How Long Do I Have To Wait Before I Can Borrow From My Whole Life Insurance Policy?
Whole life and universal life insurance policies have no pre-determined expiration date, but are more expensive than term policies. If premiums are paid, the policy remains in force for the lifetime of the insured. The monthly premiums are higher than term, but money paid into the policy that exceeds the cost of insurance builds in a cash value account that’s part of the policy. The cash value is meant to offset the rising cost of insurance as you age and to keep premiums level throughout life.
| Potential Pitfalls |
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| 1. Each insurance company has different rules, but in general, you can borrow up to 90% of the cash value of the policy. |
| 2. You can borrow from a life insurance policy as soon as there is enough cash value built up to take a loan in the amount you need. This can take several years to accrue depending on how your policy is structured. |
| 3. You can borrow from permanent life insurance policies that build cash value, such as whole life and universal life. You cannot borrow against a term policy since there is no cash value associated with it. |
Policy loans do not affect your credit and there is no approval process or credit check since you are borrowing from yourself. You do not need to explain how you plan to use the money, and the loan is not recognized by the IRS as income, remaining free from tax as long as the policy stays active (provided it’s not a modified endowment contract). Interest rates are typically much lower than on a bank loan or credit card, and there is no mandatory monthly payment.
It’s important to pay the loan back in a timely manner, on top of your regular premium payments. If unpaid, interest is added to the balance and accrues, putting your loan at risk of exceeding the policy’s cash value and causing your policy to lapse. If that happens, it’s likely you’ll owe taxes on the amount you borrowed. The loan reduces your available cash value and death benefit, and if you pass while owing money on a life insurance loan, it will reduce the amount your beneficiaries receive.
Policy loans can be useful financial tools, but they can also create financial turmoil. Be sure to thoroughly consider the pros and cons of life insurance policy loans in the context of your situation before taking one out.
