Should you borrow from your permanent life insurance policy?
On the advantage side, borrowing against your policy can be a much easier process when compared to a bank's loan procedures. How much you can borrow depends on the amount of cash value your life insurance policy has accrued over time, as well as your individual policy. In addition, the interest rates on life insurance policy loans can be competitive with most lending institutions.
Another advantage to life insurance policy loans are the flexible repayment terms. As a general rule, most life insurance loans come with an “at will” repayment plan. That means that while you may be sent a statement every month, you don't have to make a loan payment unless you want to. The interest will keep accruing and compounding, but it allows you the flexibility to skip payments if need be. However, it's important to monitor interest accumulation and the loan balance when using your policy's cash value to cover interest as, over time, this can cause your policy to lapse and even create a large tax bill.
When you take out a policy loan against your permanent life insurance policy, it's important to understand that it's just like any other type of loan in that interest will be added to your loan balance and increase the total amount that you owe. Moreover, if you were to die before the loan's outstanding principal and accrued interest were paid, the amount would be deducted from the death benefit of your life insurance policy, leaving your beneficiaries with less of a payout. This is another reason to be cautious about borrowing too heavily against your policy because you could be jeopardizing the very reason for purchasing insurance in the first place - the security and welfare of your beneficiaries.
Taking out a policy loan is a personal decision that should be met with a lot of thought. Your life insurance policy is meant to take care of your family members in the event of your unexpected death. If your policy death benefit is reduced, your family could be negatively affected if something happened to you. Be sure to explore other alternatives that may be available to you before you borrow against your life insurance policy. If you decide to borrow from your life insurance policy, be sure to ask the company or agent for an "in-force illustration" that will show the potential impact the loan may have on your policy.
*As long required premium payments are timely made.