A life insurance loan can be a quick and easy way to get cash on hand when you need it, but there are a few details you should know before borrowing. Can you borrow from term life insurance?
Can you borrow money from life insurance policies?
Affordable life policies, such as timely life insurance, do not create any cash value, so they do not allow you to borrow money from the policy. One of the reasons why the concept of life insurance is considered affordable is that it is a pure life insurance policy. The period of life has no other value than the actual death benefit paid after the death of the insured – if the insured dies within the prescribed period.
How does a life insurance loan work?
Unlike a bank loan or credit card, field loans do not affect your credit and there is no approval process or credit check because you basically borrow from yourself. When borrowing a policy, no explanation is needed on how you plan to use the money, so you can use it for everything from bills to vacation expenses to an emergency financial situation. The loan is also not recognized as income by the IRS, therefore it remains tax-free (provided that it is not a modified grant agreement). However, the policy loan is still expected to be paid back with interest, although interest rates are usually much lower than for a bank loan or credit card and there is no mandatory monthly payment.
What are the pros and cons of a lifetime loan?
Before you decide to take out a loan from the policy, think about whether borrowing from a life insurance policy is the best way for your situation. Below are some advantages and disadvantages. Talk to your insurance company about how taking out a loan will affect your policy.
Pros:
- Short application process
- If you have cash, you can borrow without a credit check
- Policy loans do not appear on your credit report
- Policy loans may have lower interest rates
- Pay off the loan according to the schedule set by you and your supplier
- You may not repay the loan and simply deduct the amount due from the beneficiary’s benefit
Minuses:
- It must have accumulated cash value, which may take years from the date of policy start
- Risk reducing the beneficiary’s death benefit if the loan is not repaid
- The risk of losing the policy if the interest and outstanding loan amount are higher than the remaining cash value
- You can pay off a life insurance loan at any time
- When you borrow from a life insurance policy, you don’t really have to pay back the loan. In addition, you do not have to pay annual interest as long as the total amount of the outstanding loan (the original loan plus accumulated interest) does not exceed the monetary value of the policy. That’s why life insurance loans are a great alternative if you’re not sure how long you will need a loan.
