Borrowing Against Life Insurance With a Life Insurance Loan
A life insurance loan is a loan that is secured by the cash value of a life insurance policy. This means that the insurance company will use the cash value of your policy as collateral for the loan. If you default on the loan, the insurance company can take the money from your cash value to repay the loan.
Life insurance loans can be a convenient way to access cash, but there are some things to keep in mind before you take one out.
How do life insurance loans work?
When you take out a life insurance loan, the insurance company will lend you a certain amount of money, up to a maximum of the cash value of your policy. You will then have to repay the loan, plus interest, over a period of time.
The interest rate on a life insurance loan is typically lower than the interest rate on a credit card or other type of loan. However, it is important to remember that you will still have to pay interest on the loan, even if you die before you repay it.
The pros and cons of life insurance loans
- Convenient: Life insurance loans can be a convenient way to access cash quickly. You do not have to go through a lengthy application process or provide any collateral other than your life insurance policy.
- Flexible: You can use the money from a life insurance loan for anything you want, such as paying for a medical expense, home improvement, or debt consolidation.
- Tax-deductible: The interest you pay on a life insurance loan may be tax-deductible, depending on your individual circumstances.
- Reduces cash value: Every time you take out a life insurance loan, you reduce the cash value of your policy. This means that your beneficiaries will receive a smaller death benefit if you die before you repay the loan.
- Interest accrues: You will have to pay interest on the loan, even if you die before you repay it. This means that your beneficiaries may have to pay off the loan balance out of their death benefit.
- Can lapse the policy: If you do not repay the loan, the insurance company may lapse your policy. This means that you will lose the death benefit and any remaining cash value.
When should you consider a life insurance loan?
Life insurance loans can be a good option if you need to access cash quickly and you have a permanent life insurance policy with a significant amount of cash value. However, it is important to weigh the pros and cons carefully before you take one out.
If you are considering a life insurance loan, here are some things to do:
- Get quotes from multiple insurance companies.
- Compare the interest rates, terms, and conditions of each loan.
- Make sure you understand how the loan will affect your cash value and death benefit.
- Only take out a loan if you are confident that you can repay it.