How To Borrow From Life Insurance While Alive?
Life insurance policies that have a cash value account can be borrowed from while the insured is still alive. Permanent life insurance policies, such as whole life and universal life, build cash value that can be borrowed against. Here are some important things to consider when borrowing from life insurance:
| Important Facts |
|---|
| The most you can borrow against your life insurance is up to 90% of its cash value. |
| It can take several years for enough cash value to build up to take a loan in the amount needed. |
| Term life insurance policies do not have a cash value component and therefore cannot be borrowed against. |
| Interest rates on policy loans are typically lower than bank loans or credit cards. |
| A policy loan reduces the available cash value and death benefit, and if unpaid, interest is added to the balance and accrues, putting the loan at risk of exceeding the policy’s cash value and causing the policy to lapse. |
| The loan is not recognized by the IRS as income and remains free from tax as long as the policy stays active (provided it’s not a modified endowment contract). |
| If the loan is not paid back before the insured person’s death, the loan amount plus any interest owed is subtracted from the amount the beneficiaries are set to receive from the death benefit. |
Policy loans do not affect credit, and there is no approval process or credit check since the borrower is essentially borrowing from themselves. The loan can be used for anything from bills to vacation expenses to a financial emergency. However, it’s important to pay the loan back in a timely manner, on top of regular premium payments, to avoid risking the policy lapsing and becoming taxable. Be sure to thoroughly consider the pros and cons of life insurance policy loans in the context of your situation before taking one out.
Sources: Investopedia / Michela Buttignol, Strategy, Northwestern Mutual, Internal Revenue Service
