Borrowing against Life Insurance

There are many different types of life insurance, but the biggest factor to consider when
purchasing a policy is whether to get term or whole life. Term life insurance provides you with a
death benefit for a pre-determined number of years, and is one of the least expensive types of
life insurance. It is well-suited for many situations, and is especially useful for younger
individuals who may have families still at home, or for people who may have just made a large
purchase such as a house. However, term life has no cash value.

Whole life insurance policies on the other hand, provide both a death benefit and cash value.
Your monthly premium is higher, but your policy is an actual asset and will increase in value
over time. The fact that your whole life insurance policy is an asset gives you a major
advantage, in that it is something you can cash in or borrow against in an emergency. Of
course, the death benefit will be reduced proportionately if you reduce the value of the policy
by cashing in some of its equity. If you die before the loan is repaid, the balance due would be
taken out of the death benefit, with the remainder distributed to your heirs.

In most cases, you will not have any significant asset for at least the first three to five years of
your policy. The policy is not like a savings account, where you can borrow or take out the
exact amount you have put in. That's because only part of your premium is actually going to
accumulate into an asset, part of it is still going to pay for the death benefit.

If you do have enough equity in your life insurance policy, you may be able to use it as
collateral for a loan, or cash it in outright. As a loan, you must pay it back as you would any
other type of loan. Because the loan is secured against a solid asset however, you are likely to
be able to get an attractive interest rate, and this may offer you a major advantage. The first
thing to consider is the cost of money. If you are in need, what are the alternatives to
leveraging your life insurance, and what will those alternatives cost? If your credit is sterling
enough and you can obtain a low-interest signature loan without using your life insurance as an
asset, then take the signature loan and leave the insurance policy unencumbered. However, if
the only way you can raise money is by getting advances on credit cards that carry interest
rates of 18 to 24 percent, it's likely you'll be better off borrowing against your life insurance.

When you first purchase your life insurance policy, think ahead and decide whether you may
need to borrow against it in the future. Policies will differ, but most will have a loan clause that
will allow a loan to be taken against it for as much as 90 percent of the policy's cash value. 
What is a Life Insurance Policy Loan?

A life insurance policy loan is a commonly used tool that allows people access to
borrow against their policy. While borrowing against your life insurance should not
be taken lightly, under the right circumstances, it can be a good decision. There are
a few advantages to using a life insurance policy loan as a method to obtain the
funds you need. Let's take a look at what a life insurance policy loan is and why it
might be a good idea.

Minimal Paperwork

A life insurance policy loan involves minimum paperwork to get started. Most of the
time, your life insurance policy will have a section that defines exactly when and
how you can borrow against your policy. Some policies allow you to borrow up to
90% of the cash value of your policy. It usually amounts to a simple form that you
fill out and then submit back to the company. They will give you the money and the
terms required to repay the loan.

Low Interest

Borrowing against your life insurance policy is much different than borrowing from
the bank. One of the most advantageous aspects of a life insurance loan is the
interest rate that you will get. Most of the time, it will be substantially lower than
any other type of loan you could acquire. Anytime you can get low interest, it just
makes sound financial sense. Even if it means that you have to borrow against your
life insurance policy, it is still to your advantage.

Easier Approval

Getting a personal loan from a traditional lender comes with a lot of background
checks, credit checks, and income verification. A life insurance policy loan is a lot
easier to come by. Your credit rating is not really a factor in the loan. You are
basically borrowing money from yourself because you could cash the policy out
instead if you desired. Therefore, you do not face the stiff credit checks that come
with other types of loans. If you need the money, you can usually get your hands
on it relatively easily.

Flexible Payments

Another added benefit of using a life insurance loan is the flexible terms that come
with it. When you start an insurance loan, you are given the money and you can
repay the money at will. You are sent a statement every month, but if you don't
want to repay the money yet, don't repay it. The interest will still keep
accumulating and the longer you wait, the more it will cost you. However, you can
make payments at your leisure.
The only catch is that you cannot allow the balance to go over the cash value of the
policy. At that point, you will be required to repay the loan or at least get it down
below the cash value again. This makes the repayment process a lot easier to deal
with than other types of loans.

Whole life insurance policies provide you the ability to take out a policy loan in
order to access cash to make a desired purchase. Let's look at some key
components of a policy loan.

No questions asked.

A home, car, and boat are typical things that a lender will loan money to an
individual to purchase. But what if you wanted to get a loan in order to buy a
painting? How about stock certificates? Or, how about a doodad like a flat screen
TV?

A bank will likely turn you down. A life insurance company won't. The policy owner
can take a loan for whatever reason...no questions asked.

No Credit Check.

The insurance company doesn't run a credit check to see if you "qualify" for a loan
and what rates it can charge you. So, this process will not hurt your FICO score.

And, there is no chance that you will get denied for a loan (as long as you have
ample cash value). Since you are the owner of the policy and not the insurance
company, you outrank every other potential borrower that is seeking to use the
available money within your policy.

Flexible Terms and Conditions.

You have no obligation to repay this loan. If you carry the loan balance to your
grave, the death benefit provided by the policy will repay the loan balance.

The flexibility of a policy loan can certainly ease some pressure if you find yourself
financially strapped.
Bonus!

There are opportunity costs when you are borrowing money and paying it back
along with interest. With a bank loan, the money going towards the balance and the
interest is gone forever and can no longer earn you interest. It can no longer work
for you.

What some don't realize is that the cash from a policy loan is from the insurance
company. That's right, you are not borrowing your own money. You are borrowing
against your cash value from the insurance company. Your cash value within the
policy acts as the collateral for the loan.

As you are paying down a policy loan with interest on a decreasing principal, the
cash value within the policy stays put and continues to earn compounding interest.
Remember, you are borrowing from the life insurance policy with your cash value
as the collateral. Here, you are being your own bank.

An Example

We recently took a policy loan to finish out the payments on our car. We called up
the insurance company and asked for a policy loan for $2249.31.

Since we had available cash value in the policy, we were approved. The
representative didn't ask what the reason was for the loan. There was no credit
check. We received the check for $2405.24 5 days later (which includes the loan
interest paid in advance of $155.93).

Yes, it was that simple. We are not under any obligation to repay the loan.
However, it would be beneficial for us to do so to restore the death benefit, cash
value, and dividend payable. Plus, if we pay the loan balance prior to the
anniversary date, we are given credit for any unearned interest on the amount
repaid. For example, if we repay the loan in six months, we are credited six months
of interest since we paid prior to the anniversary date.

So you see, this may be the best way to borrow money. Utilize policy loans. Have
your dollars still working for you while you are borrowing money.

Policy Loans

Life insurance policies with a cash surrender value usually have loan provisions
that allow the policyholder to borrow up to the cash value of the policy.
Although the insurance company has the right to delay paying the loan for up
to 6 months, it rarely does so.
 The interest rate ranges from 5 to 8%. Unless the interest rate is stipulated to
be variable in the contract, the interest rate never changes regardless of
prevailing rates, but most policies issued today have variable interest rates,
which have a maximum ceiling. However, in most cases, the cash value of the
policy that is equal to the loan amount is also earning less interest, so the
effective interest rate is higher. For instance, if a policyholder borrows $40,000
against a policy that has $100,000 of cash value, $40,000 of the cash value
may be earning 3% while the remaining $60,000 of the cash value may be
earning 5%. So not only is the policyholder paying 5 to 8% interest on the
loan, but she is earning 2% less on the cash value backing the loan.

People often wonder why they have to pay interest on their own money. The
reason is that when insurers calculate what premium to charge, they expect to
earn a certain amount of interest on the money, which helps keep premium
costs lower. If the insured takes money out, then that money isn't earning
anything from being invested, so the insurer has to charge interest on the
policy loan. Furthermore, to maintain liquidity to make policy loans, the insurer
must invest part of the premiums in lower yielding, short-term debt.
Consequently, the loan interest compensates the insurer for this opportunity
cost.

The main advantages of a policy loan over other loans is that there is no credit
check; the interest rate is usually much lower; the policyholder can pay back
the loan according to virtually any repayment schedule; and, in fact, the
policyholder is not even legally obligated to pay back the loan.

However, if death occurs while the loan is outstanding, then the insurance
proceeds are reduced by the amount of the loan outstanding plus interest. If
the loan and accumulated interest exceeds the cash value of the policy, then
the policy lapses.

Some insurance policies have an automatic premium loan provision. If the

insured fails to pay the premium by the end of the grace period, then the insurer
will pay the premium with a policy loan, and will continue to do so until the cash
value of the policy falls below the premium amount, in which case, the policy will
lapse.
 Life Insurance Loan Facts

Borrowing from your life insurance policy is one of the few ways people can access their own cash in
a hurry. Although these funds are there for the policy owner's use, taking money out of your
insurance policy can be detrimental to your purpose of providing security in the event of your death
and in some cases, can be a taxable headache. Knowing the advantages and disadvantages of
taking out a loan on your life insurance policy can be beneficial when considering this important
decision.

The Facts

1. Whole life insurance is one of several types of policies that have a cash value account.
Variations of whole life such as universal and variable life, also allow you to save money. Whole life
is the most sold insurance policy in the United States with more than 70 percent of consumers
purchasing this type over other policies. The cash account earns interest and the percentage is
based on the performance of the company. The company also sets its own guidelines as to how
much you can borrow from your account. The typical loan amount ranges from 90 to 100 percent of
your total cash value.

Pros

2. The money you borrow from your life insurance policy is tax free. A loan does not have to be
repaid, and if you want to reimburse your account, there is no set timetable to do so. Unlike a 401(k),
you don't get penalized for early and frequent withdrawals. The interest rate can be higher than the
traditional savings account in banks offers. There are no hassles about asking for your money, nor
are there questions about when you are going to pay it back to the insurance company.

Cons

3. If you decide not to repay the loan, it will drop the face and cash value of your life insurance
policy. The loan amount will be subtracted from the amount to be paid out upon your death. For
instance, if you have a $100,000 policy and you borrowed $10,000 and didn't pay it back, your
beneficiaries will only receive $90,000 from the insurance company. If you decide to surrender your
 policy the same process will happen. Some companies may tack on steep fees or service costs for
taking out a policy loan.

Misconceptions

4. A policy loan is vastly different from a loan from a bank. There are no penalties for not
making payments on time and you cannot on a policy loan. Another huge misconception is that the
money you borrow is your money. Technically it isn't. The amount in your cash value account is
yours, but the loan is from the insurer. Your money is used as collateral. It may seem confusing but it
justifies why your loan amount grows with interest over time. Borrowing your own money shouldn't
have an interest rate.

Warning

5. Not paying your policy loan back is your decision, however, there are dire consequences if
one does not. If your loan plus interest exceeds the cash value of the policy, it is possible that your
insurance company will bill you for the difference. It is also possible that the money that was
received tax free may become taxable income in those rare situations. Besides the fact that such a
loan over time can wipe out the benefit amount you wanted to pay your loved ones, you could be
forced to pay for something that ends up being worthless, which could be worse than having no life
insurance policy.

Loan
“Loan” is a fairly common word and it has many meanings for many industries. You probably think that you know all
the meanings possible. Do you know what a loan is in terms of life insurance cash value? Well, we might have just
stumped you! Getting a loan on life insurance is not the same as a regular old loan from a bank. Before you get too
tempted by one of these loans, do your research and figure out how it can work best for you. It is your money and
your life insurance policy, therefore you should really take your time and try to figure out the results ahead of time.

Getting a Policy Loan

As the policyholder, you can use the cash value of the life insurance, while still maintaining the original protection, in
the form of a policy loan. The interest rate of the policy loan will be noted within your policy. There will be yearly
interest that you have to pay. As far as principal payments go, you can make whatever payments you would like in
order to reduce the loan amount. You are not required to pay back the loan, but you do have to pay the interest. If
you do not pay the interest it will be subtracted from the cash value that you have left over. This will continue as long
as there is enough cash value within the policy.
Your Policy Needs to Support the Loan
There might come a time when the outstanding loans and interest you have accumulated exceed the policy loan
value. This is something that you really need to avoid. If this happens you will have to make a payment to reduce the
loan and interest to a value that your policy will be able to support. This is why you still have to keep track of all your
loans and interest, even though you are borrowing from your own life insurance cash value. There still has to be
money there for you to use and you must remember to show them that you are stable. How do you know if you
should borrow a policy loan?

Should You Borrow?

A positive about borrowing from your life insurance cash value is that the interest rate tends to be lower than what
you might be charged on a regular loan. It is important that you read through your policy and know as much about the
interest rates as you can. The negative about borrowing is that you are taking from your own life insurance cash
value! There is only so much of this, and after a while you could really be hurting your future plans. Borrowing money
can be addicting, especially when it is as easy as a life insurance policy loan. Just make sure you are always acting
with your best current interests in mind as well as your best future interests. The choice is yours!