What You Need to Know About Borrowing from a Life Insurance Policy

Borrowing from Life Insurance Robert Taurosa

When life insurance policies were first introduced, they were meant to cushion the beneficiary from financial worry in the event of the insured’s death. However, as time passed by, life insurance incorporated savings and investment into the package. Policies such as whole life and universal life insurance provide cash value back to the insured.

What You Need to Know

You cannot ask for a loan if you have a term life insurance policy. This is because the insurer does not offer any additional benefits. A term policy is only meant to benefit your beneficiaries in case you die before the contract expires.

If your policy has a cash value, think before you ask for the loan. Find out how the loan will affect your policy. Typically, when you borrow on your life insurance policy, the cash value acts as collateral. If you fail to pay back the loan, the insurer can take the cash value. However, you run the risk of losing your entire policy if the interest payments plus the actual loan amount is more than the cash value.

Before you borrow on your life insurance policy, the cash value has to be substantial. Usually, you build this value through years of saving. Talk to a qualified financial planner about how you can build up this cash value.

When asking for the loan, the insurance company will give you a form to fill. Watch out for hidden costs in the form. For example, is there an ‘opportunity cost‘ that you may have to pay? Find out if you can afford to pay the interest payments. Make sure that the loan and interest repayments won’t affect the death benefit portion of your policy.

Borrowing on your life insurance policy is much easier than borrowing from the bank. You don’t have to go through a lengthy application process. You ask, and if the cash value is sufficient, you get your loan.  

Before you borrow on your life insurance, make sure that you have the right policy. A term life policy does not allow you to borrow while a whole life policy will enable you to do so. Then, talk to a financial planner to see how the loan will affect policy benefits.

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What You Need to Know About Borrowing from a Life Insurance Policy

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