Life Insurance You Can Borrow From

Shawn Plummer

CEO, The Annuity Expert

Do you ever wish you had extra cash to put towards a big purchase or cover an unexpected expense and don’t want to take out a bank loan?

With a life coverage policy, that may be an option. Life insurance is traditionally considered something we buy and then keep until death, so surviving family members are taken care of financially. But increasingly, people are discovering the benefits of taking out life insurance loans to allow them to borrow when money is tight.

This guide will explore what life policies offer this benefit and how it works. Read on for all the information you need about tapping into your cash value through borrowing from your policy.

What Are The Requirements For Borrowing From a Life Insurance Policy?

The requirements for borrowing from a life insurance policy vary based on the type of loan, the death benefit of the policy, and the insurer. To name a few:

  • You must be the policyholder or a beneficiary of the policy.
  • The loan amount cannot exceed the death benefit of the policy.
  • The loan must be used for a good purpose, such as medical expenses, educational costs, home repairs, or other qualified needs.
  • A loan application fee may apply, and you must pay interest.
  • You may be required to submit evidence of financial need or sign a promissory note.
  • The loan will reduce the policy’s death benefit and cash value if not repaid.
  • If you default on the loan, your lender can collect any assets cashed out from the policy.
  • The insurer may have additional requirements, such as a credit check or proof of income.

How do You Borrow From a Life Insurance Policy?

Borrowing from a life insurance policy is pretty straightforward. Depending on the type of policy, you may be able to access the funds immediately or will need to wait for your policy to mature before taking out a loan.

Many policies allow you to borrow up to 90% of the cash value within the policy and can be used for anything you need, such as paying off debt or investing in other opportunities.

To borrow from a life insurance policy, contact your insurance provider, who will review the loan details and provide information on how to proceed. In addition, you may be required to fill out an application and provide documentation verifying your identity and financial standing.

The amount you can borrow, the interest rate, and repayment terms may vary depending on your policy type. Remember that if you fail to make payments, your policy could be canceled or lapsed, and you may lose any remaining cash value. So before taking out a loan from your life insurance policy, ensure you understand all the terms and conditions associated with the loan.

What is Cash Value Life Insurance?

Permanent life insurance policies usually include a savings component called cash value, which allows the policyholder to accrue funds over time. This money can be used for various purposes, such as supplemental income, paying off debt, covering college tuition costs, and more. The cash value is usually invested in the policyholder’s choice of investments, such as stocks or bonds. In addition, cash-value life insurance typically offers death benefits, so when the policyholder dies, the beneficiary receives both the death benefit and any accumulated cash value.

Do Life Insurance Policies Have Cash Value?

Yes, some life policies do have cash value.

Whole and universal life policies are two types of permanent life insurance that accumulate cash value over time. The cash value can be accessed through policy loans or withdrawals and is tax-deferred. This means you can take out a loan or withdrawal without incurring any taxes, but the amount of the loan or withdrawal will reduce the policy values and survivor benefits. The cash value also grows on a tax-deferred basis, meaning it accumulates interest over time without being taxed each year. When you surrender your policy, any remaining cash value will be paid minus any loans or withdrawals taken.

Keep in mind that permanent life coverage generally costs more than term life policies, so depending on the size of your premium, it may take longer to build a substantial cash value.

Which Life Insurance Policies Build Cash Value The Fastest?

Whole and universal life policies typically build cash value the fastest. This is because whole life provides a guaranteed death benefit and fixed premiums, while universal offers more flexibility, allowing you to adjust your premiums or death benefit as needed.

Both policies also offer tax-deferred cash value growth, which can be used for future expenses or investments. Additionally, both policies typically offer policyholders access to loans against the cash value of their policies.

It’s important to note that cash value is not a guaranteed investment return, and fees are associated with taking out a loan against it. Additionally, if you don’t repay your loan in full following a period specified by the insurance company, your policy’s death benefit may be reduced.

What Forms of Life Insurance Can You Borrow From?

The most common forms of coverage that you can borrow from are whole life and universal life insurance. Whole life has a death benefit and a cash value component, which can be borrowed against. Universal life also has a cash value component that can be borrowed. With both policies, the loan is secured by cash value and can be used to cover various expenses.

However, when taking out a loan against your life policy, it is essential to remember that you are reducing the death benefit that beneficiaries will receive upon your passing.

When borrowing from a life policy, there are typically two payment options:

  • Pay the loan and interest back in full or
  • Make monthly payments on both the principal and the interest.

Your interest will be based on several factors, such as your policy type, the amount borrowed, and the insurer. Additionally, some policies may include a feature known as ‘acceleration of the death benefit, which allows you to pay back the loan in full and reinstate the death benefit.

Finally, it is essential to remember that if a loan isn’t paid back within a specific time, the remaining balance could be deducted from the death benefit.

What is The Best Type of Life Insurance Policy to Borrow From?

The best type of life policy to borrow from depends on your individual needs and preferences. Some popular options include whole, universal, and variable life insurance.

  • Whole-life policies provide a fixed death benefit and accumulate cash value over time. Additionally, whole-life policies are designed to cover the insured person for their entire life.
  • Universal insurance provides a fixed survivor benefit and accumulates cash value, but they offer more flexibility in premium payments.
  • Variable life policies are similar to whole life policies, except they allow you to invest the cash value portion of your policy into different types of investments.

Each policy has its benefits and drawbacks, so it is essential to consider your options before deciding which one is right. Talking with a qualified financial advisor or life insurance agent is also essential to ensure you understand the policies and their features.

Borrowing from your insurance policy can be a great way to access funds for emergency expenses or other financial needs. However, it is essential to remember that when you borrow from your policy, you reduce the survivor benefit of the policy, which could leave loved ones without the financial resources they need when you pass away.

Are There Term Life Insurance Policies Can You Borrow From?

Permanent life insurance offers a key benefit not available with term life: the ability to borrow money from your insurer against the policy. Since term life policies have no cash value account, this benefit is only accessible through permanent plans.

This benefit can be a potential source of funds if you ever find yourself in a financial pinch. In addition, the cash values accumulated over time with permanent policies serve as supplemental retirement income for many policyholders. This is one of the most attractive features of permanent life insurance and an important consideration when deciding between term and whole life.

How Much Money Can I Borrow From my Life Insurance?

The amount of money you can borrow from your life insurance policy depends on the type of policy you have and the terms of the policy.

Generally speaking, most life insurance will allow a loan to be taken against the cash value or survivor benefit. However, the amount of money that can be borrowed is usually limited to the lesser of either the cash value or a percentage of the survivor benefit.

It is important to note that any loan taken against a life insurance policy will reduce the survivor benefit and cash value and must be repaid with interest. However, in some cases, interest on the loan may be waived or deferred.

Do You Have to Pay Back Money You Borrow From Life Insurance?

Yes, if you borrow money from a life insurance policy, it must be repaid. The policyholder is usually responsible for repaying the loan with interest. Failure to repay the loan may result in the policy lapsing or being surrendered, and the survivor benefit is reduced or eliminated. Be sure to understand the terms and conditions of your particular policy before taking out a loan against it.

It is important to note that if you die while the loan is still outstanding, the debt must be paid back with interest from any survivor benefit proceeds. This means that there will be less money available for beneficiaries than anticipated. Therefore, you should consider using life insurance as a loan source and ensure your beneficiaries know the potential consequences of taking out such a loan.

Finally, be sure to research all other possible options before borrowing against your life insurance policy. For example, it may be difficult or impossible to repay the loan if you experience financial hardship in the future. You may also be subject to higher interest rates or fees from the loan.

What Happens When You Take a Loan on Your Life Insurance?

When you take a loan against your life insurance, the insurer will provide you with a loan in cash or a check. The loan amount is based on your policy’s cash value and can be up to 90% of its value. You will need to repay the loan plus interest, although you are not required to make any payments until the policy matures or you surrender it. If you do not repay the loan, it will be deducted from any survivor benefit payout due upon your passing.

A loan against your life insurance policy is often viewed as a last resort since it can reduce the survivor benefit and potential savings. However, if you need money to cover an emergency expense or other financial obligation, this could be an option that makes sense for you.

Can You Get a Cash Advance on a Life Insurance policy?

Yes, you may be able to get a cash advance on your life insurance policy. Depending on the type of policy and the insurer, it may be possible to borrow a portion of the survivor benefit while you are still living. This is an accelerated death benefit option or a living benefit loan.

The amount available for cash advance will depend on the insurer, the type of policy, and how long you have been paying premiums. Generally, the longer you have held the policy, the greater the cash value will be available for a cash advance. Also, policies with higher death benefits are likely to yield a higher acceleration than those with lower limits.

When considering an accelerated benefits option, weighing the costs and benefits of taking out this cash advance is essential. For example, some insurers may charge fees and interest for loans taken against the policy, which can reduce the amount of money you receive and increase the loan balance. Additionally, taking a loan out on your life insurance policy reduces the survivor benefit given to your beneficiaries upon death.

How do I Withdraw Money From my Life Insurance Policy?

The process for withdrawing money from a life insurance policy depends on your policy type. Generally, you can withdraw money from a permanent life insurance policy, such as whole or universal insurance, by taking a loan against your policy’s cash value. This loan requires no repayment and must not be reported as income on your taxes.

On the other hand, term life insurance has no cash value and cannot be used to take out loans or withdrawals.

How Long Does it Take to Borrow Money From a Life Insurance Policy?

The amount of time it takes to borrow money from your life insurance policy loan can depend on the type of policy and the insurer. Generally, it may take anywhere from a few days to several weeks for the loan to be processed and approved. Some policies may require approval for a medical exam and additional paperwork. Additionally, some insurers may limit the amount that can be borrowed or require borrowers to pay back the loan within a specific timeframe.

Are Life Insurance Policy Loans a Good Idea?

Depending on their circumstances, life insurance policy loans can suit some people. Sometimes, taking out a loan from your life insurance policy can be a financially advantageous way to access funds without taking on additional debt or liquidating other assets. However, it is essential to consider the potential risks and consequences of taking out such a loan before making this decision.

When you take out a loan from your life insurance policy, the amount of the policy’s cash available for your heirs may be reduced. If you don’t repay the loan before you die, then whatever is left outstanding will be subtracted from the survivor benefit to your beneficiaries. Similarly, if borrowing money from your loan reduces your policy’s cash value to zero, the survivor benefit may be reduced or eliminated.

Next Steps

Borrowing from your life insurance loan is not as common as borrowing from a 401k or other retirement account, but it may be a suitable option in some cases. If you are facing financial difficulties and need to borrow money, talk to your life insurance agent, life insurance broker, or financial professional about the possibility of taking out a loan against your policy and accessing your accrued cash value. You may be surprised at how much cash value you have and how easy and flexible the process can be.

Life Insurance You Can Borrow From

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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