Can I Borrow Money from My Life Insurance Policy
Did you know that your life insurance policy is considered an asset? So much so that life settlement companies will happily buy it from you and gain your death benefit. Before you sell your life insurance policy though, there are many other ways you can make it work for you, including taking out a loan on your death benefit.
How it Works when you Borrow from your Life Insurance Policy
The first step before borrowing from or selling your life insurance should always be to talk to your life insurance company because every case is slightly different with its own nuances. Either way, here are the main highlights when you borrow from your life insurance policy:
- Permanent or universal life insurance policy
- Your death benefit acts as collateral
- Payout of pocket or put your policy at risk
Permanent or whole life insurance policy
It’s important to note that you can only borrow against permanent or whole life insurance. That means that you can’t borrow against your term life insurance. Those policies are cheaper than permanent policies and don’t have a cash value component. Essentially, when you borrow from your life insurance, you’re effectively using the cash value as collateral.
Your death benefit acts as collateral
When you borrow, you can use either your death benefit or your life insurance policy’s cash value as collateral. Essentially, the cash value acts as an extra benefit. Nevertheless, your death benefit is also valuable for potential lenders. Of course, this implies that your policy’s value has built up over time which normally takes about 10 years or so.
Payout of pocket or put your policy at risk
Whilst a loan against a life insurance policy is relatively flexible, if you don’t pay it back then the interest will start increasing. You might then find yourself with a total loan that exceeds the overall cash value. That’s when your policy collapses and you have to pay everything back anyway. If that’s a potential issue for you then you might consider a life settlement process. In that case, you get a one-off payment but you don’t have to deal with any repayments.
What to Consider before you Borrow from your Life Insurance Policy
Nothing in this life is clear cut and whilst you should get advice from your policyholder, it’s worth noting a few key points before you decide to borrow against the value of your policy, as detailed below:
- How your cash value will be depleted
- Impact on dividends and overall policy
- Lose other benefits
How your cash value will be depleted
If you borrow from your cash value then clearly the amount is going to go down. Don’t forget though that a cash value helps keep your mortality costs at a reasonable rate so that the actual cost of your life insurance isn’t too much for you. If your premium payments don’t cover the mortality costs and other fees associated with your life insurance then your insurer will take the extra money from your cash value. If this ever goes to 0 then your policy terminates and suddenly you’re faced with an income tax bill. Again, that risk might not be something you want to deal with so life settlements might be an option. When people sell their life insurance, they’ve usually considered all these options first.
Impact on dividends and overall policy
Some life insurance policies payout dividends. If you’re relying on these to pay your loan’s interest then you’ll need to get your insurer to help you with the calculations. Essentially, you’re going to be borrowing from the cash value that will then go down but it’s also what pays your dividends. Therefore, talk to your advisors before you sell your life insurance policy.
Lost Other Benefits
Taking out a loan counts as income in the eyes of many benefit institutions. It’s therefore worth investigating how a loan will impact any other support benefits you might be receiving. Again though, talk to your insurer and your welfare officer for more details about your particular case.
Advantages of Borrowing before you Sell Life insurance Policy
If you require a loan then you’re probably also struggling with your premium payments. That’s when most people consider either canceling their policy or selling an insurance policy to a life settlement company. Of course, there are some risks associated with borrowing against your life insurance policy. Regardless, there are also huge advantages as detailed below:
- Flexibility in repayments
- Avoids mortgaging your home
- No approvals and lower interest rates
One of the best advantages of borrowing from your life insurance policy is that there are no approvals because it’s already your asset. Generally, that also means that you can be pretty flexible with your repayments and make them at intervals that suit you. The interest rates are also much lower than anything you could get if you decided to mortgage your home. That also comes at great risk if you consider the potential loss of the roof over your head.
Final Advice from those who Sell Life Insurance Policy
Having a life insurance policy can be a great asset because you have several options about how to use it even when you’re still alive. Don’t just jump into deciding to sell a life insurance policy though if you’re struggling for money. Investigate how taking out a loan from your cash value would impact your policy for your specific case. Talk to your insurer and even a life settlement company to get both sides of the story before you use your insurance policy for cash. You’ll then be able to make an informed decision that works for you.