Can You Borrow Money From Your Life Insurance Policy?

by Leon on April 20, 2013

is borrowing from my life insurance a good ideaIf you’re in a current situation where you need a significant amount of cash, but you don’t want to rely on your credit cards or take out a home equity or payday loan in order to get it, another option that you might want to consider is borrowing money from your life insurance policy. If you weren’t aware of the fact that this is something that you can do, it is, although we definitely recommend that you explore some of the pros and cons with taking out this particular kind of loan before making the decision to do so.

The Pros of a Life Insurance Loan

First, let’s explore some of the benefits that come with taking out a loan on your life insurance policy. One thing that people like most about this particular choice is that most life insurance loans tend of have a lower interest rate than a loan that you would take out with a bank. Plus, there is no pressure to pay the loan back. You will simply receive a statement at the end of the year letting you know how much is owed, including the interest (which tends to be between 5-9 percent). So, as you can see, there are some good things that come with taking out this kind of loan.

The Cons of a Life Insurance Loan

Before you call your insurance agent to set a loan agreement up, there are some cons that you should consider too. Perhaps the one that you should be prepared for most of all is the fact that you would need time to accumulate a certain amount of money on the policy in order for the loan to truly benefit you. In most cases, that would be about 5-10 years. Another thing to keep in mind is that although you don’t have to pay back the loan on a set schedule, should you happen to die before it is paid back, the people who are listed as the beneficiaries of your policy will only get whatever amount remains after your insurance company gets the amount that is owed from the loan back (including the interest). Still, another factor to consider is the fact that if you decide to totally surrender your loan, that could cause your payments to skyrocket should you choose to take out another life insurance policy in the future. And, if you are diagnosed with some significant health issues in between the time of surrendering one policy and applying to get another, the insurance company may choose to deny you.

As you are weighing out the advantages and disadvantages that come with taking out a life insurance loan, there are two other things to think about as well. One is to remember that the loan is coming from your insurer; therefore, the amount of money that you are paying into the policy is actually used as collateral for the loan (that’s why they are able to charge you interest). Also, if you consulted with a life insurance brokerage company about if it’s a good idea to take out this kind of loan, they might tell you to use extreme caution being that if your loan exceeds the total of the policy itself, your insurance company could end up billing you for the difference. Bottom line, as you come to a decision, be sure not to treat it like a “quick fix” but an available choice, should you need it.

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