Know How To Borrow Money Against Your Life Insurance Plan
Table of Contents
The cash value in a life insurance policy is equivalent to the amount of money you would receive if you surrendered the policy. Each time you pay premiums for a cash value life insurance policy, such as whole or universal life insurance, part of the premium is put towards the cash value.
The cash value grows over time at an interest rate set by the policy's terms. If you have a permanent life insurance policy that accumulates cash value, you can borrow money from the insurer using the cash value as collateral. However, this option is typically only available once your life insurance policy's cash value has reached a specific size, which may take five to 10 years of paying premiums.
How Much Can You Borrow from a Life Insurance Policy?
How much you can borrow from a life insurance policy varies by insurer, but the maximum policy loan amount is typically at least 90% of the cash value, with no minimum amount.
When you take out a policy loan, you're not removing money from the cash value of your account. Instead, you're taking a loan from the insurer and just using the cash value as collateral. This is a significant benefit, as the cash value remains within the life insurance policy and continues to accumulate interest.
You don't need to pay back the loan in a set period, as is required of many other forms of loan. However, if you don't pay the insurer the annual interest, which can be fixed or variable, the interest payment will be added to the value of your outstanding loan.
How do you take out a life insurance policy loan?
The process of taking out a life insurance loan is straightforward. You just fill out a form from the insurer, and you often get the money deposited in your account within a few days. You may need to confirm your identity, sign a confirmation document or provide a notarized confirmation before receiving your loan if:
- You provided new account information to the insurer in the last month
- The policy changed ownership recently
- The loan exceeds a specific size.
Pros and cons of taking out a life insurance loan
Life insurance collateral loans are a simple way to get money on short notice with few restrictions. You need to be very careful about managing the account's cash value and paying off interest as required. However, besides the risk of the policy lapsing, there are few downsides to borrowing against your whole or universal life insurance.
There are no qualifiers for a policy loan
Unlike other loans, you don't need to qualify to borrow against your life insurance policy. There's no credit check, so the loan doesn't appear on your credit report. And you don't have to provide proof of income. At most, you'll just have to prove your identity and that you're requesting the loan.
Since there are no checks or qualifications, life insurance collateral loans can be a great solution if you need money quickly, such as for an emergency medical expense. Alternatively, they can be used as a stop-gap if you're applying for a loan elsewhere, taking a long time to be approved.
Conclusion
Life insurance collateral loans typically have lower interest rates than you would get with a personal loan or credit card. While rates vary, they typically fall within the range of 6% to 8%, again depending on who holds your insurance and your policy.
Also read- What Is The Best Way To Identify A Good Life Insurance Company In 2022?
