Sometimes things happen in life, and you could end up with debts that are difficult to repay without a little help. If you’re looking for some extra cash, have you ever considered that you could borrow from your life insurance policy? Yes, it is possible to borrow from your policy – that financial cushion is not just for when you pass away. But before you go digging into your policy, there are a couple of things you need to be aware of: for example, you can only borrow from a permanent or whole life insurance policy. Not only that, but there are rules you need to know so you don’t put your family’s future financial security at risk.
Does Your Policy Allow You To Borrow?
One of the first questions that needs to be addressed is if your life insurance policy actually allows you to borrow from it. The short answer is: as long as your life insurance policy has a cash value, you can borrow from it. Permanent life insurance policies, including final expense, whole life, and universal life insurance all have cash value.
Term life insurance only provides you life insurance for a fixed period of time, generally anywhere from 10-30 years, and provides a payout if you pass away during that term. Because there is no cash value in a term life insurance policy, you cannot borrow against it.
If you have a permanent life insurance policy, your cash value is like a savings account that builds interest over time, and as you pay your premiums, the cash value increases. Each life insurance company will set their own cash value amount and let you know when you can use it. The downside to having one of these policies? They are generally more expensive than term life policies, because they will cover you for your whole life, and because of the cash value you accrue with them.
How Borrowing From A Life Insurance Policy Works
When you are in need of cash, you can consider borrowing from your life insurance policy’s cash value; how much you can borrow from it depends on the size of your policy and how much you have paid into it. You will first have to request a loan from your policy’s cash value, because you are not actually taking money out of the cash value: the insurance company is extending a loan to you and using your cash value as collateral. The loan is also not recognized by the IRS as income, therefore it will not be taxed.
Unlike a bank loan, life insurance policy loans do not affect your credit and there is no approval process necessary – it’s your money to use! The more money that you have paid into your policy, the lower your payments to pay back the loan will be. It is important to note that interest on the loan will begin to accrue immediately, at a rate determined by the insurer. The rate is typically lower than that of a bank.
Paying Back A Loan
Most life insurance companies will have a flexible payback schedule, but it’s in your best interest to pay back your loan as quickly as possible, because the loan amount can be deducted from the death benefit that your family would receive in the event of your passing. Not only that, but the policy can lapse if a substantial amount is taken out and not repaid. Once it lapses, you essentially lose your policy, leaving your family without any financial security in the future.
When Should You Borrow From Your Policy?
You can borrow from your policy at any time, but you should only do so if you:
- No longer need the death benefit- If you are retired and have no major expenses, and if your family is financially secure and you do not need the death benefit, a loan against your policy can work for you. In this situation, you can also consider surrendering the policy and collecting the accumulated cash value.
- Don’t qualify for any other loans- If you cannot get a loan from a bank or any other source, your life insurance policy is a good option. One of the pros is that you will not have your credit checked or affect your credit score when you apply for the loan.
- You can pay the loan back– It is always nice to take out a loan when you need cash, but if you do so from your life insurance policy, you will need to pay it back or lose the policy. If you know you can pay it back, taking out the loan when needed is a no-brainer.
If something were to happen to you, your family would be facing emotional hardships, as well as financial ones. Life insurance is a great way to help your loved ones with those financial hardships: the money they receive will help pay for expenses related to your death, and any other debts or bills they have. There are many different kinds of life insurance policies to choose from, including whole life insurance, term life insurance, and final expense insurance, so if you’re not sure where to begin, consider using online tools, or speaking with an agent. The right policy for you is out there! We have provided the top insurance companies that offer life insurance policies below; each can give you hassle-free assistance and the most competitive rates in the nation. Always check multiple sites to make sure you have bargaining power and know the advantages of each company. Make sure a hard time isn’t made harder by a financial burden, check life insurance rates today.