Important Facts

Can I loan money to myself from a Life Insurance Policy?

Financial difficulties may put you in dire need for cash, this article explains the pros and cons to borrowing against your permanent life insurance policy.

Weighing The Pros and Cons of Borrowing From Your Permanent Life Insurance Policy

It's not uncommon for someone with a permanent life insurance policy to borrow against their policy. But there are advantages as well as disadvantages when it comes to borrowing from your policy.

On the advantage side, borrowing against your policy involves minimal paperwork and it can be much easier to get an approval versus a bank because in most cases, your credit isn't a factor. 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 contract. In addition, the interest rates on life insurance policy loans can be quite low compared to 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, but it allows you the flexibility to skip payments if need be.

However, 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. For this reason, 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 this type of 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.

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