Are you wondering whether you can borrow money from your life insurance policy? Yes, it is possible provided your policy has accrued cash value that can be used as collateral. The primary purpose of a life insurance policy is to provide death benefits in the event of the insured person’s demise. However, there is an added benefit that allows you to borrow against your policy’s cash value once you have paid enough premiums.
Though it might come across as an effortless way to acquire a quick cash loan, it is imperative to have a clear understanding of certain specifics of taking loans against insurance policy to make an informed decision.
Is It Possible to Borrow Against Term Life Insurance?
You can borrow money only against permanent life insurance like a whole or universal life insurance policy. For every premium you pay for a life insurance policy, a part of the sum goes into the cash value, which grows over time. If you have a life insurance policy with enough accumulated cash value, you can take out a loan from the insurance company, using the cash value as collateral. However, to accrue enough life insurance cash value for a loan, it may take five to ten years of paying premiums.
Term life insurance is a cheaper life insurance policy that does not build any cash value. Thus, you cannot take out a loan from the policy.
How Taking a Loan against Life Insurance Policy Works
Compared to traditional bank loans or credit card loans, a loan on insurance policy requires no checks or qualifications. There is no credit check or approval process; neither do you need to provide any income proof. This feature makes policy loans a perfect solution if you need quick money or in case of a financial emergency. As against bank loans, in policy loans, you are not borrowing money from your account. Instead, you are borrowing money from the insurance company, using your policy cash as collateral. It means that your policy’s money will remain as it is and will continue to generate interest.
How Do You Pay Back the Loan on Insurance Policy?
Unlike traditional loans, you do not need to pay back policy loans within a given period. It is because your policy cash value is getting used as collateral. However, you must pay back the loan on time, along with the annual interest. Not doing so will result in the interest getting added to your outstanding loan amount, causing the due balance to surpass the policy’s cash value. As a result, your policy will lapse, and you will incur taxes and lose your coverage.
It will help if you have a clear understanding of the pros and cons of taking a loan against a life insurance policy. Even if you plan to take out a policy loan, always monitor the loan’s size compared to your policy cash value and pay the interest on time.
Your life insurance guarantees that your loved ones will be taken care of in your absence. Contact the experts at ISU Wissink Insurance in Culver City, California, for the best life insurance options.