How To Borrow: Life Insurance Policy

 

Borrowing from a life insurance policy is an option if you have a permanent life insurance policy, such as “whole life” or “universal life”, which builds “cash value” over time. Here’s a step-by-step guide on how to borrow from your life insurance policy:

1. Verify Your Policy Type
– You can only borrow against life insurance policies that build cash value, like whole life or universal life insurance.
– Term life insurance “does not” have a cash value component, so you cannot borrow against it.

2. Check Your Cash Value Balance
– Contact your insurance provider or check your policy statements to find out how much cash value has accumulated in your policy.
– You can typically borrow up to a certain percentage (often 90%) of the cash value.

3. Understand Loan Terms
– Interest Rate: Borrowing from your policy incurs interest. The rate is typically set by the insurer and can be fixed or variable.
– Loan Repayment: Unlike traditional loans, there’s no fixed repayment schedule. However, unpaid loan balances (plus interest) will reduce the death benefit paid to your beneficiaries if you pass away before repaying the loan.
– Impact on Cash Value: The amount you borrow will reduce the cash value in your policy, which may affect the growth of the policy’s value.

4. Contact Your Insurance Company
– Reach out to your insurance company to initiate the loan process. Some insurers may allow you to borrow online, while others may require paperwork.
– Ensure you understand all loan terms, including repayment options, interest rates, and potential impacts on your death benefit.

5. Receive the Loan
– Once approved, the insurer will disburse the loan funds, either by check or direct deposit.

6. Repay the Loan (Optional)
– Repayment is typically flexible. However, it’s advisable to repay the loan to restore the full value of the death benefit and avoid compounding interest.
– If you don’t repay, the outstanding loan balance (including interest) will be deducted from the death benefit or the remaining cash value when you pass away or surrender the policy.

Key Considerations
– Tax Implications: Loans from a life insurance policy are typically “tax-free”, as long as the policy remains active.
– Policy Lapse Risk: If the outstanding loan balance exceeds your cash value and premiums are unpaid, your policy could lapse, resulting in the loss of coverage and potential tax consequences.

Borrowing against your life insurance policy can be a flexible way to access funds when needed, but it’s important to understand the long-term impact on your policy’s benefits. Always review the terms and consult with a financial advisor if necessary.

PM Insurance Services can help you set up your life insurance.