Perhaps you have considered borrowing money from your life insurance policy during a financial emergency. While receiving a life insurance loan is a great way to get some quick cash, there are a few things you must know.
Difference Between Life Insurance and Traditional Loans
Life insurance loans differ from traditional loans because they don’t impact your credit. Since you are borrowing from your funds, you aren’t subject to an approval process. You don’t have to worry about a credit check because no explanation is necessary regarding your reasons for taking out the loan. Also, the cash value keeps growing as your dividends are collected. Another feature of life insurance loans is that they are generally recognized as tax-free income by the Internal Revenue Service. The interest rates, too, are substantially lower than other types of loans. You also won’t be required to make monthly payments.
Policies That Allow Borrowing of Loans
You can only borrow money if you have a permanent life insurance policy. These insurance policies last till the policyholder’s death. While the monthly premiums are more expensive than term life insurance policies, the money you put into the policy over the years likely exceeds the death benefit, which allows the cash value to build up. The life insurance loan does not impact your death benefit amount as the money is withdrawn from the cash value, and the insurer uses the insurance policy as loan collateral.
Life Insurance Loan Guidelines
Remember that every life insurance company has a specific insurance loan that rules out a loan as soon as you have built enough cash to cover the needed amount. Generally, life insurance companies allow people to borrow up to 90% of accrued cash value.
Even though life insurance loans have low-interest rates, it’s important to pay them back as soon as possible. The interest continues to grow regardless of whether you have started paying back the loan. Failing to repay the loan may cause your policy to lapse though most life insurance companies provide flexible payment options to keep your policy from lapsing. If the loan is not paid back in full before you pass away, the loan amount plus unpaid interest is deducted from the death benefit your beneficiaries receive.
Do Term Life Policies Offer Life Insurance?
You aren’t allowed to take out a life insurance loan against a term life insurance policy because those policies do not include cash value features.
Life Insurance Loan Variables
It’s recommended that you avoid reducing your death benefit. Taking a lot of money out of your life insurance policy reduces your death benefit amount. It’s also recommended that you pay attention to your policy guarantee. The guarantee in many life insurance policies is based on whether you continue to pay your premiums and maintain the cash value level. Taking out a life insurance loan may impact your insurance guarantee.