Should You Borrow Money from Your Life Insurance Policy?

If you have a universal, whole, or variable life insurance policy you can potentially borrow from the policies as a line of credit; this is because as you pay your premiums over time it will build cash value in your policy. The question, however, is should you borrow against your policy?

While your life insurance plan can come in handy if you require additional financial support at some point, it may not be your best option. In this article we’ll take a look at what a loan from your life insurance would entail and what possible pros and cons are of doing so.

What is a life insurance loan?

Because the life insurance policy serves as collateral, it’s not usually a complicated process to borrow from it. When you seek to take this loan out you are typically able to borrow up to the amount of cash value that you’ve paid into it. Bear in mind, however, that not all life insurance plans will allow you to borrow against them; only whole, universal, or variable life insurance policies will allow you to do so.

Many borrowers prefer to take loans from their insurance policies because they are not tied to a specific repayment plan, or if they are it’s typically pretty flexible. This is because any unpaid borrowed amounts will just be deducted from the payable amount at the time of pay out. Usually, loans can be continued to be taken out during the course of the plan as long as the premiums are being paid.

What are the pros of taking out a life insurance loan?

There are definitely certain draws that borrowing from a life insurance plan has and reasons that borrowers will opt to utilize this method over others when additional cash is needed. Here are a few of those reasons:

No proof of income is required as long as payments are being made on time.
No credit check is required, which is helpful to those with problematic credit histories.
No stringent repayment requirements. Payment plans are usually lenient or at your discretion.
Interest rates are typically much lower than what you can secure with a traditional creditor or bank.
The amount you’re able to borrow can be larger than what you can secure from another creditor or bank, dependent on how much you’ve paid into the policy.

What are the cons of taking out a life insurance loan?

While there are definite positive aspects to borrowing from your insurance plan, caution is still stressed because there are factors that can negatively impact you and your finances. Let’s take a look at a few of them that are important to consider:

Interest rates can compound quickly, even if they’re low. This means that the amount you owe can quickly exceed the value of your policy if you don’t pay on your loan promptly.
If you borrow against your policy and it’s needed before you’ve paid it back, your family can experience a burden financially in affording funeral expenses or paying off other debts.
The amount you borrow is potentially taxable if your policy is canceled or surrendered.

What other options are available to me?

As with any loan consideration, it’s always important to weigh your options and carefully choose the route that will work best with your individual financial situation. Some other options you might consider instead of borrowing against your life insurance policy are:

Borrowing from your 401k retirement plan
Taking out a home equity line of credit
Opening up a new low-interest credit card
Taking out a new unsecured line of credit with your bank