You can get a loan on life insurance policy types such as whole life, universal life, and variable life. These are all types of cash value policies – that cash value growth is what generates the asset you can borrow against. We’ll explain what cash value is, what types of policies have cash value, and what kinds of loan options are available.
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Request a Free QuoteWhich Types of Life Insurance Let You Take a Loan?
You can take a loan on life insurance policy types that contain cash value. These policies last for your entire life – they’re different from term policies, which have an expiration date. You’ll also hear them referred to as “permanent” policies.
Every time you make a payment toward a cash value policy, part of your payment pays for the cost of your coverage. The rest goes into your cash value account, which grows based on your payments and the interest credited by your insurer. Each policy type has a different way of crediting interest. If you have a particular growth strategy in mind, that’s going to influence the policy type you should choose.
- Whole life. Grows with a low, flat, guaranteed rate of interest. No risk, but no chance to grow cash value quicker.
- Universal life. Grows with a variable interest rate set by your insurer and based on current interest rates; however, there will always be a guaranteed minimum rate. Grow cash value faster when interest rates are high, but when they’re low, your growth will likely be slower than what you may be able to earn through other investments.
- Indexed universal life. Tie your cash value growth to a market index. When it does well, you earn more interest. When it does poorly, you earn less or zero interest. Take advantage of an upside market, with downside protection against any loss.
- Variable universal life. Invest some or all of your cash value into a selection of stocks and funds. Chance of loss, but also a chance to grow your cash value quicker than a flat rate.
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Request a Free QuoteWhat Happens When You Take a Loan on Your Life Insurance?
First, you need to let your cash value grow for a few years. There won’t be enough in there to take a loan yet, if you’re thinking of doing so right away. When the time comes, you’ll be able to borrow against most of the cash value in your account (up to 90%).
Monitor your account statements, and when there’s enough there to borrow against, follow your insurer’s procedure to request a loan. Usually, this will just involve submitting a form. Keep in mind that you’re not actually removing money from the cash value account. All that money stays there, used as collateral for the amount you’re borrowing from your insurer. Since the money stays in your account, it can continue to earn interest, which will offset the interest rate charged by insurer for your loan.
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Request a Free QuoteLife Insurance Policy Loan Pros
Getting a loan from your insurer is an easy process, but you should be aware of the pros and cons of taking a loan on life insurance policy cash value. It’s easy and it’s private, but you still need to be vigilant to make sure you leave your loved ones as much of the death benefit as possible.
- Not on your credit report. Because this loan is considered a private contract, it is not reported to the credit monitoring agencies and will never appear on your credit report.
- Guaranteed approval. There is no chance of rejection because you are borrowing against your own cash value – from yourself, in essence.
- Lower interest rate than a bank or credit card loan. Insurers will charge a small amount of interest, but it won’t be as much as you’d pay to advance yourself money from a credit card or take out a private loan from the bank.
- No income tax due on loan amount. As long as you keep your life insurance policy active by making your payments, this loan is not considered income. You do not have to report it to the IRS or pay income tax on it.
- No limit on what you can do with the money. You can use it for anything you need or want – there are no rules or restrictions. Renovate your home, pay a child’s college tuition, take a trip, pay a bill, or just use it as extra retirement income.
- No requirement to pay it back. Although there are good reasons to pay this money back, it’s not required and there are no minimum payments or payment schedule. If you pass away with an outstanding loan, the insurer will deduct that amount from the death benefit before it gets paid out to your loved ones.
➡️ Want to talk to a real person about taking a loan on life insurance policy cash value? We’re here for you! Call us at (800) 823-4852 or click the button below to request a free quote!
Request a Free QuoteLife Insurance Policy Loan Cons
- You owe interest on your loan. Even though this is less than what you’d pay in interest for a personal bank loan, it’s still going to add up over time. Be aware what your insurer will charge and evaluate if it’s worth taking the loan.
- If the loan exceeds current cash value, your policy may lapse. Like any loan, this one will accrue interest over time. If you make no payments and your increasing loan balance becomes greater than your cash value, that will cause your policy to lapse. Most insurers will give you a grace period or an opportunity to make a payment and reinstate coverage, but you don’t want to count on them to notify you. If your policy were to lapse, not only would your loved ones no longer have a death benefit coming their way, but you would then owe income tax on the loan.
- May diminish death benefit. Any unpaid amount on your loan will be deducted from the policy’s death benefit when you pass away. Depending on the size of your loan and the policy’s face value, this might not be an issue. Just be aware that your choices now may affect your loved ones later.
- May reduce ability to use cash value to pay premiums. If you want to use your cash value to pay your policy’s premiums, taking a loan will reduce the available amount of that cash value. Make sure you balance these two financial needs against each other before choosing how to use that cash value.
Life insurance loans are a financial tool. As long as you use them wisely, they can help you do anything, from paying off an unexpected bill to checking an item off your bucket list. This is a true living benefit for you, the policyholder. You don’t have to be dead to use your life insurance!
➡️ Want to talk to a real person about taking a loan on life insurance policy cash value? We’re here for you! Call us at (800) 823-4852 or click the button below to request a free quote!
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