Life Insurance Loans: Personal Loans From Whole Life Insurance Policies

Borrow From a Whole Life Insurance Policy

Provided your whole life insurance policy has sufficient cash value, you may be able to borrow an amount that is usually tax-free, yet which includes an interest charge on the policy loan. When you borrow from permanent life insurance policies, you should always check with your insurer to make sure you have sufficient funding in the cash value account, that your policy permits life insurance loans, and that you understand the terms around these personal loans.

Depending on your life insurance policy, you may have two loan options:

While the loan specifics will depend on policy to policy, there are rules and limitations on the amount and potentially the frequency that you may be able to borrow from your life insurance policy's cash value, and you will often find that your whole life policy must have reached a certain level before you can borrow funds against it, usually with a percentage cap. The cash value in life insurance policies increases at different rates based on factors such as the permanent life insurance product type and how cash value accumulates, so the amount of time you may need to wait before becoming eligible for borrowing from the policy will vary.

If you require a loan to cover financial emergencies such as medical bills, payments on credit cards, or urgent home improvements, and you comply with the relevant loan eligibility criteria, you could potentially borrow money from your life insurance policy without any credit checks required. Additionally, you may find a permanent life insurance policy that grants you the flexibility to pay for student costs, such as college expenses or student loans. Borrowing criteria will vary depending on the life insurance policy loan.

Policyholders who cannot access a conventional bank loan or require cost-effective borrowing as quickly as possible may find that taking out a loan against their whole life insurance policy could be a viable alternative. Insured individuals may also be able to borrow against their life coverage policy while waiting for loan approval on another borrowing solution.

Taking Out a Cash Value Loan From a Whole Life Insurance Policy

We mentioned that some life insurance policies accrue cash value at different rates, and depending on the amount of the premiums paid into their policy, many policyholders may need to wait for several years before their insurance policy has sufficient cash value to borrow from. While this time period may vary, an insurance provider can only grant a personal loan request once the policy has sufficient cash value to fund the loan, using the insurance policy value as loan security.

Repaying Life Insurance Policy Loans

Deciding whether or not to repay the life insurance loan may depend on the terms offered, but most insurance companies do not require a formal loan repayment schedule to be followed, and some insurance companies don’t require the loan to be repaid at all. However, not repaying the loan may negatively impact your policy, or could result in an increasing interest charge.

Loan interest may be payable annually and can be either variable or fixed, so it is important to evaluate the conditions of your insurance policy and plan for repayments accordingly. It's also a good idea to discuss your loan contract and terms with a trusted financial advisor.

Interest Rates on Your Life Insurance Loan

Loan interest payments may be directly payable, accumulate over time, or be deducted from the cash value of your insurance policy. Repaying the loan slowly or not repaying it at all could negatively impact your policy, including the death benefit and insurance premiums.

How Loans Impact Policy Death Benefits

Taking out a loan against the account value could impact the death benefit if the loan is not repaid, since the insurance company will typically deduct the loan and accumulated interest from your death benefit and therefore reduce the death benefit that is ultimately payable to your policy beneficiaries.

Advantages When You Borrow Against a Whole Life Insurance Policy

There are several scenarios in which borrowing from your life insurance policy is an attractive solution to financial difficulties, including the following:

• Securing funds when you are ineligible or otherwise cannot access a loan from your bank or credit union
• Competitive interest rates, which may be lower than those available through personal loan products 
• Choosing a borrowing option that does not require you to use your home mortgage as collateral 

Having the flexibility to structure your loan repayments in a way that suits your personal circumstances (In other cases, a whole life policyholder may be concerned about missing loan payments and the potential for their insurance policy to lapse. However, if there is sufficient cash value remaining in the policy even after the loan is taken, the insurance policy will likely remain in effect.)

Considerations to Be Aware of When Borrowing Against Life Insurance Policies

As with any loan borrowing, it is important to be conscious of the terms and potential drawbacks and to think about these before you intend to repay the insurance loan. It is important that cash value borrowers take the time to consider their options before they take out a loan against their policy for personal expenses, such as a mortgage or medical expenses. Most whole life insurance policies will charge an interest fee on policy loans.

Interest may accrue on the life insurance loan rather than being immediately payable. However, if you do not repay the insurance loan, the balance owed on the loan will typically be deducted from the death benefit should the policyholder die before the loan is repaid.

Depending on the amount borrowed from the policy and any threshold limits on the percentage of available cash value, the interest owed on the loan could potentially accrue to a higher value than the payable death benefit. In this loan scenario, there is the possibility that your whole life insurance coverage will lapse, which may have further tax implications if your insurance loan is subsequently considered a source of income. This may be a crucial factor if you intend to use your life insurance coverage to leave an inheritance or financial support for your family members or partner.

Whether you hope to take out a personal loan against your whole life or universal life insurance policy, it's important to weigh all of your options first and ensure you understand the conditions of your policy loan. Irrespective of the reason for the loan, we advise you to seek advice and guidance from a trusted financial professional before making any decisions about a policy loan.

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