Is It Possible to Take a Loan from Your Life Insurance Policy?

When does it make sense to surrender life insurance policy?

If you find yourself in a bind and need cash, your insurance coverage may be able to help. However, make sure you have “universal life” or “whole life” insurance, both types of permanent life insurance.

Because it has no temporal restriction on how long it will cover you, this insurance policy does include a cash value element, particularly late on. The indemnification benefit is funded primarily with premiums in the policy’s initial periods. The monetary value of the policy rises with time.

While acquiring from your life insurance policy can be a fast and straightforward approach to get immediate cash the moment you need it, there are a few specifics to be aware of before you borrow. Above all, you can only borrow with whole life or permanent insurance policy.

Policies You Can Borrow From

Whole life policies are a more costly kind of life coverage. However, it has no termination date. The term lasts the insured’s lifetime. While the month-to-month charges might be higher, the insurance company invests cash paid into the coverage that surpasses what is required for the death benefit. As a result, this makes a cash value following a couple of years.

A whole life policy has two qualities: the death benefit or face value and the cash value as savings. When the cash invested increases the death benefit amount, you can borrow against the tax-exempt cash value. Likewise, it is essential to comprehend that they don’t remove the policy loan from your death benefit but is acquired against it. And your insurance agency utilizes your policy loan collateral.

How a Life Insurance Loan Works

Unlike a credit card or bank loan, policy loans don’t influence your credit, and there is no credit check or approval process since it’s only like borrowing money from yourself. When you borrow from your policy, the company won’t need clarification about how you intend to utilize the cash, so it very well may be used for anything from vacation expenses to a monetary crisis to bills.

Because the loan is not considered income by the IRS (Internal Revenue Service), it is exempt from federal and state income taxes (provided it doesn’t have a contract for modified endowment). However, you should still repay policy loans with interest, even if those rates are generally lower than on credit cards or bank loans, and you also won’t have to worry about required monthly payments.

Borrowing From a Life Insurance Policy

You can use the cash worth of a life insurance policy as collateral for a loan without requiring a credit analysis. However, they will reduce the death benefit if a debt remains unpaid. It’s critical to find the right balance between your immediate needs and your long-term objectives in this situation.

Clearing off a loan for your home, financing your kid’s college tuition, or going on holiday are all possible applications for borrowing money against a life insurance policy. Additionally, you’ll have to pay interest on the loan, which typically ranges between 5% and 8%. If the interest and loan remain unpaid before your death, the company will reduce the death benefits to reflect your loan fees and balance.

Even if you don’t have to pay back the loan, interest will accrue until you repay it or you pass away.

Repaying the Loan

Indeed, despite the flexible payback schedule and low interest rates, it’s significant for you to pay the loan appropriately. If you pay using cash on hand, they will add interest to your balance and accumulate if the bill is paid month to month. In turn, this puts your loan in danger of surpassing the arrangement’s cash value and making your policy lapse. For the most part, insurance agencies provide numerous chances to prevent lapsing and maintain a current loan.

There will be a deduction from the beneficiaries’ death benefit for any loan amounts that are still unpaid before the insured individual dies, plus any accrued interest.

Surrendering a Life Insurance Policy

When you take your life insurance policy’s absolute cash value out, you’ve surrendered it. You have essentially canceled your insurance coverage by clearing the monetary value. The funds you’ve invested for your coverage along with the interest you earned when you terminate your policy. However, you’ll be responsible for any existing loans or charges. Keep in mind that surrendering your insurance may have drawbacks, including surrender penalties and federal tax implications.

Ensure you know the proper way to borrow money from your life insurance policy and how to pay it back appropriately. If you still have questions, you can call your insurer to discuss the terms and conditions if you might need emergency funds in one go.

Meta title: Can You Borrow Money from Your Life Insurance?
meta desc: Don’t know where to get money? Borrowing from your life insurance should be a last resort, but if you’ve tried other options, here’s what you must remember.


David Rosenberg: A seasoned political journalist, David's blog posts provide insightful commentary on national politics and policy. His extensive knowledge and unbiased reporting make him a valuable contributor to any news outlet.