Borrowing against a whole life insurance policy can provide access to funds through a policy loan. Some key points: - Policy loans have minimal paperwork, low interest rates compared to other loans, and flexible repayment terms. - The cash value of the policy is used as collateral, so the loan amount is limited to a percentage like 90% of the cash value. - Not repaying the loan reduces the death benefit paid to beneficiaries. If the loan exceeds cash value, the policy may lapse. - While providing access to funds, frequent or excessive policy loans can undermine the long-term purpose of life insurance protection. Borrowers must manage loans carefully.

1. Borrowing against Life Insurance<br />There are many different types of life insurance, but the biggest factor to consider when purchasing a policy is whether to get term or whole life. Term life insurance provides you with a death benefit for a pre-determined number of years, and is one of the least expensive types of life insurance. It is well-suited for many situations, and is especially useful for younger individuals who may have families still at home, or for people who may have just made a large purchase such as a house. However, term life has no cash value.<br />Whole life insurance policies on the other hand, provide both a death benefit and cash value. Your monthly premium is higher, but your policy is an actual asset and will increase in value over time. The fact that your whole life insurance policy is an asset gives you a major advantage, in that it is something you can cash in or borrow against in an emergency. Of course, the death benefit will be reduced proportionately if you reduce the value of the policy by cashing in some of its equity. If you die before the loan is repaid, the balance due would be taken out of the death benefit, with the remainder distributed to your heirs.<br />In most cases, you will not have any significant asset for at least the first three to five years of your policy. The policy is not like a savings account, where you can borrow or take out the exact amount you have put in. That's because only part of your premium is actually going to accumulate into an asset, part of it is still going to pay for the death benefit.<br />If you do have enough equity in your life insurance policy, you may be able to use it as collateral for a loan, or cash it in outright. As a loan, you must pay it back as you would any other type of loan. Because the loan is secured against a solid asset however, you are likely to be able to get an attractive interest rate, and this may offer you a major advantage. The first thing to consider is the cost of money. If you are in need, what are the alternatives to leveraging your life insurance, and what will those alternatives cost? If your credit is sterling enough and you can obtain a low-interest signature loan without using your life insurance as an asset, then take the signature loan and leave the insurance policy unencumbered. However, if the only way you can raise money is by getting advances on credit cards that carry interest rates of 18 to 24 percent, it's likely you'll be better off borrowing against your life insurance.<br />When you first purchase your life insurance policy, think ahead and decide whether you may need to borrow against it in the future. Policies will differ, but most will have a loan clause that will allow a loan to be taken against it for as much as 90 percent of the policy's cash value. <br />What is a Life Insurance Policy Loan?<br />A life insurance policy loan is a commonly used tool that allows people access to borrow against their policy. While borrowing against your life insurance should not be taken lightly, under the right circumstances, it can be a good decision. There are a few advantages to using a life insurance policy loan as a method to obtain the funds you need. Let's take a look at what a life insurance policy loan is and why it might be a good idea.<br />Minimal PaperworkA life insurance policy loan involves minimum paperwork to get started. Most of the time, your life insurance policy will have a section that defines exactly when and how you can borrow against your policy. Some policies allow you to borrow up to 90% of the cash value of your policy. It usually amounts to a simple form that you fill out and then submit back to the company. They will give you the money and the terms required to repay the loan.Low InterestBorrowing against your life insurance policy is much different than borrowing from the bank. One of the most advantageous aspects of a life insurance loan is the interest rate that you will get. Most of the time, it will be substantially lower than any other type of loan you could acquire. Anytime you can get low interest, it just makes sound financial sense. Even if it means that you have to borrow against your life insurance policy, it is still to your advantage.Easier ApprovalGetting a personal loan from a traditional lender comes with a lot of background checks, credit checks, and income verification. A life insurance policy loan is a lot easier to come by. Your credit rating is not really a factor in the loan. You are basically borrowing money from yourself because you could cash the policy out instead if you desired. Therefore, you do not face the stiff credit checks that come with other types of loans. If you need the money, you can usually get your hands on it relatively easily.Flexible PaymentsAnother added benefit of using a life insurance loan is the flexible terms that come with it. When you start an insurance loan, you are given the money and you can repay the money at will. You are sent a statement every month, but if you don't want to repay the money yet, don't repay it. The interest will still keep accumulating and the longer you wait, the more it will cost you. However, you can make payments at your leisure.The only catch is that you cannot allow the balance to go over the cash value of the policy. At that point, you will be required to repay the loan or at least get it down below the cash value again. This makes the repayment process a lot easier to deal with than other types of loans.Whole life insurance policies provide you the ability to take out a policy loan in order to access cash to make a desired purchase. Let's look at some key components of a policy loan.<br />No questions asked.<br />A home, car, and boat are typical things that a lender will loan money to an individual to purchase. But what if you wanted to get a loan in order to buy a painting? How about stock certificates? Or, how about a doodad like a flat screen TV?<br />A bank will likely turn you down. A life insurance company won't. The policy owner can take a loan for whatever reason...no questions asked.<br />No Credit Check.<br />The insurance company doesn't run a credit check to see if you quot;
qualifyquot;
for a loan and what rates it can charge you. So, this process will not hurt your FICO score.<br />And, there is no chance that you will get denied for a loan (as long as you have ample cash value). Since you are the owner of the policy and not the insurance company, you outrank every other potential borrower that is seeking to use the available money within your policy.<br />Flexible Terms and Conditions.<br />You have no obligation to repay this loan. If you carry the loan balance to your grave, the death benefit provided by the policy will repay the loan balance.<br />The flexibility of a policy loan can certainly ease some pressure if you find yourself financially strapped.<br />Bonus!<br />There are opportunity costs when you are borrowing money and paying it back along with interest. With a bank loan, the money going towards the balance and the interest is gone forever and can no longer earn you interest. It can no longer work for you.<br />What some don't realize is that the cash from a policy loan is from the insurance company. That's right, you are not borrowing your own money. You are borrowing against your cash value from the insurance company. Your cash value within the policy acts as the collateral for the loan.<br />As you are paying down a policy loan with interest on a decreasing principal, the cash value within the policy stays put and continues to earn compounding interest. Remember, you are borrowing from the life insurance policy with your cash value as the collateral. Here, you are being your own bank.<br />An Example<br />We recently took a policy loan to finish out the payments on our car. We called up the insurance company and asked for a policy loan for $2249.31.<br />Since we had available cash value in the policy, we were approved. The representative didn't ask what the reason was for the loan. There was no credit check. We received the check for $2405.24 5 days later (which includes the loan interest paid in advance of $155.93).<br />Yes, it was that simple. We are not under any obligation to repay the loan. However, it would be beneficial for us to do so to restore the death benefit, cash value, and dividend payable. Plus, if we pay the loan balance prior to the anniversary date, we are given credit for any unearned interest on the amount repaid. For example, if we repay the loan in six months, we are credited six months of interest since we paid prior to the anniversary date.<br />So you see, this may be the best way to borrow money. Utilize policy loans. Have your dollars still working for you while you are borrowing money.<br /> Policy Loans<br />Life insurance policies with a cash surrender value usually have loan provisions that allow the policyholder to borrow up to the cash value of the policy. Although the insurance company has the right to delay paying the loan for up to 6 months, it rarely does so.<br />The interest rate ranges from 5 to 8%. Unless the interest rate is stipulated to be variable in the contract, the interest rate never changes regardless of prevailing rates, but most policies issued today have variable interest rates, which have a maximum ceiling. However, in most cases, the cash value of the policy that is equal to the loan amount is also earning less interest, so the effective interest rate is higher. For instance, if a policyholder borrows $40,000 against a policy that has $100,000 of cash value, $40,000 of the cash value may be earning 3% while the remaining $60,000 of the cash value may be earning 5%. So not only is the policyholder paying 5 to 8% interest on the loan, but she is earning 2% less on the cash value backing the loan.<br />People often wonder why they have to pay interest on their own money. The reason is that when insurers calculate what premium to charge, they expect to earn a certain amount of interest on the money, which helps keep premium costs lower. If the insured takes money out, then that money isn't earning anything from being invested, so the insurer has to charge interest on the policy loan. Furthermore, to maintain liquidity to make policy loans, the insurer must invest part of the premiums in lower yielding, short-term debt. Consequently, the loan interest compensates the insurer for this opportunity cost.<br />The main advantages of a policy loan over other loans is that there is no credit check; the interest rate is usually much lower; the policyholder can pay back the loan according to virtually any repayment schedule; and, in fact, the policyholder is not even legally obligated to pay back the loan.<br />However, if death occurs while the loan is outstanding, then the insurance proceeds are reduced by the amount of the loan outstanding plus interest. If the loan and accumulated interest exceeds the cash value of the policy, then the policy lapses.<br />Some insurance policies have an automatic premium loan provision. If the insured fails to pay the premium by the end of the grace period, then the insurer will pay the premium with a policy loan, and will continue to do so until the cash value of the policy falls below the premium amount, in which case, the policy will lapse.<br />Life Insurance Loan Facts<br />Borrowing from your life insurance policy is one of the few ways people can access their own cash in a hurry. Although these funds are there for the policy owner's use, taking money out of your insurance policy can be detrimental to your purpose of providing security in the event of your death and in some cases, can be a taxable headache. Knowing the advantages and disadvantages of taking out a loan on your life insurance policy can be beneficial when considering this important decision.<br />The Facts<br />Whole life insurance is one of several types of policies that have a cash value account. Variations of whole life such as universal and variable life, also allow you to save money. Whole life is the most sold insurance policy in the United States with more than 70 percent of consumers purchasing this type over other policies. The cash account earns interest and the percentage is based on the performance of the company. The company also sets its own guidelines as to how much you can borrow from your account. The typical loan amount ranges from 90 to 100 percent of your total cash value.<br />Pros<br />The money you borrow from your life insurance policy is tax free. A loan does not have to be repaid, and if you want to reimburse your account, there is no set timetable to do so. Unlike a 401(k), you don't get penalized for early and frequent withdrawals. The interest rate can be higher than the traditional savings account in banks offers. There are no hassles about asking for your money, nor are there questions about when you are going to pay it back to the insurance company.<br />Cons<br />If you decide not to repay the loan, it will drop the face and cash value of your life insurance policy. The loan amount will be subtracted from the amount to be paid out upon your death. For instance, if you have a $100,000 policy and you borrowed $10,000 and didn't pay it back, your beneficiaries will only receive $90,000 from the insurance company. If you decide to surrender your policy the same process will happen. Some companies may tack on steep fees or service costs for taking out a policy loan.<br />Misconceptions<br />A policy loan is vastly different from a loan from a bank. There are no penalties for not making payments on time and you cannot on a policy loan. Another huge misconception is that the money you borrow is your money. Technically it isn't. The amount in your cash value account is yours, but the loan is from the insurer. Your money is used as collateral. It may seem confusing but it justifies why your loan amount grows with interest over time. Borrowing your own money shouldn't have an interest rate.<br />Warning<br />Not paying your policy loan back is your decision, however, there are dire consequences if one does not. If your loan plus interest exceeds the cash value of the policy, it is possible that your insurance company will bill you for the difference. It is also possible that the money that was received tax free may become taxable income in those rare situations. Besides the fact that such a loan over time can wipe out the benefit amount you wanted to pay your loved ones, you could be forced to pay for something that ends up being worthless, which could be worse than having no life insurance policy.<br />Loan<br />“Loan” is a fairly common word and it has many meanings for many industries. You probably think that you know all the meanings possible. Do you know what a loan is in terms of life insurance cash value? Well, we might have just stumped you! Getting a loan on life insurance is not the same as a regular old loan from a bank. Before you get too tempted by one of these loans, do your research and figure out how it can work best for you. It is your money and your life insurance policy, therefore you should really take your time and try to figure out the results ahead of time.<br />Getting a Policy Loan<br />As the policyholder, you can use the cash value of the life insurance, while still maintaining the original protection, in the form of a policy loan. The interest rate of the policy loan will be noted within your policy. There will be yearly interest that you have to pay. As far as principal payments go, you can make whatever payments you would like in order to reduce the loan amount. You are not required to pay back the loan, but you do have to pay the interest. If you do not pay the interest it will be subtracted from the cash value that you have left over. This will continue as long as there is enough cash value within the policy.<br />Your Policy Needs to Support the Loan<br />There might come a time when the outstanding loans and interest you have accumulated exceed the policy loan value. This is something that you really need to avoid. If this happens you will have to make a payment to reduce the loan and interest to a value that your policy will be able to support. This is why you still have to keep track of all your loans and interest, even though you are borrowing from your own life insurance cash value. There still has to be money there for you to use and you must remember to show them that you are stable. How do you know if you should borrow a policy loan?<br />Should You Borrow?<br />A positive about borrowing from your life insurance cash value is that the interest rate tends to be lower than what you might be charged on a regular loan. It is important that you read through your policy and know as much about the interest rates as you can. The negative about borrowing is that you are taking from your own life insurance cash value! There is only so much of this, and after a while you could really be hurting your future plans. Borrowing money can be addicting, especially when it is as easy as a life insurance policy loan. Just make sure you are always acting with your best current interests in mind as well as your best future interests. The choice is yours!<br />