When Am I Able To Borrow From My Whole Life Insurance?

Whole life and universal life insurance policies are more expensive than term, but they have no pre-determined expiration date. If sufficient premiums are paid, the policy is 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 to offset the rising cost of insurance as you age.

Money in the cash value grows at a rate that depends on the type of policy. For example, in a regular universal life policy, it grows based on current interest rates, while in a variable universal life policy, the cash value is invested by the owner in the stock market. It usually takes at least a few years for the cash value to build to sufficient levels to take out a loan.

Policy Type Loan Availability
Term No
Whole Life Yes
Universal Life Yes

When borrowing on your policy, no explanation is required about how you plan to use the money. A policy loan reduces your available cash value and death benefit. If you pass while owing money on a life insurance loan, it will reduce the amount your beneficiaries receive. Even with low interest rates and a flexible payback schedule, you should pay the loan back in a timely manner and 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.

Each insurance company will have different rules in place, but in general, the most you can borrow against your life insurance is up to 90% of its cash value. 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. Policy loans do not affect your credit, and there is no approval process or credit check since you are essentially borrowing from yourself. The loan is also not recognized by the IRS as income, therefore it remains free from tax as long as the policy stays active.

Policy loans can be useful financial tools, but they can also create financial turmoil. If you don’t make interest payments, your policy could lapse, and the entire loan amount could become taxable. And if you pass away, the loan amount and any interest owed will be taken out of the death benefit, which could significantly impact your beneficiaries.

It’s important to thoroughly consider the pros and cons of life insurance policy loans in the context of your situation before taking one out.

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