Life insurance loans - are they right for you?
If you need cash, you may be able to take out an insurance loan by borrowing against your life insurance policy. However, having the ability to get money by way of an insurance loan depends on certain factors.
The type of policy you own
First of all, what type of life insurance policy do you own? Being able to take insurance loan from your policy can only happen if you have a permanent* life insurance contract such as whole life or universal life. Why? Because unlike term insurance, these types of policies have the potential to accumulate cash value over time that you may be able to borrow from at some point in the future.
How long your policy has been in force
Loans are generally not available immediately as a policy's cash value takes time to grow. In fact, insurance companies make no guarantees as to how quickly or even how much the cash value (if any) in your policy will increase over time to where you'll be eligible to take out an insurance loan.
Your policy's guidelines
Having a permanent life insurance policy doesn't necessarily mean that you can borrow as much money as you like. Depending on your policy's guidelines, you may only be permitted to borrow against your policy if there is a certain dollar amount of cash value growth, other terms may vary by carrier.
Your ability to pay back the loan
While life insurance loans don't require that you pay back what you borrowed, it's to your benefit that you only borrow what you can pay back in a reasonable amount of time - for two reasons. First, you'll pay interest on the money you borrow. Second, if you should die before paying back the loan, the death benefit will be reduced at the time the claim is made in order to satisfy the outstanding loan. That means that your beneficiary(ies) will receive less of a financial benefit upon your death.
Before taking out an insurance loan, it's important to consider all your options. Talk to your life insurance agent or financial advisor if you're unsure if a life insurance policy loan is right for you.
NOTE: Accessing a policy's cash value through loans or withdrawals will reduce both death benefit and cash value, can contribute to policy lapse, and may result in a tax liability if the policy terminates during the lifetime of the insured.
*As long as required premium payments are timely made.