Borrowing from a Life Insurance Policy: Taking Cash Value

Because whole and variable life policies are not cheap, many people who are considering getting coverage may wonder if the cash value can be borrowed against. In most cases, the answer to that question is yes. 

A whole life policy builds cash value over time. While a term life policy, does not build any cash value (the difference between whole life and term).

Whole Life Policies Have Two Sources of Value

A whole life policy has two sources of value. The first source is the benefit paid upon the holder’s passing. The second benefit is the cash value the policy accumulates over the years through the investment of extra money. Once the money has been invested, the additional tax-free cash can be borrowed. The insurance company issues the loan, using the policy benefit as collateral. 

Loan Repayment

Loans may be repaid in various ways. Loans do not carry a mandatory monthly payment like a credit card or installment loan balance, but due require repayment over time. The insurance company charges interest on the loan, so the faster it is repaid, the cheaper the loan will be for the borrower. 

Life Insurance Policy Loan Usage

A loan made against a life insurance policy may be used for any purpose the borrower desires. This can include home improvements, debt consolidation, or even taking a vacation. Because the borrower is essentially borrowing the money from themselves, there is no need for a credit check or other due diligence by the lender prior to making a loan. 

Final Takeaway

It is essential, however, that the borrower pays attention to the loan and begin paying it back. If interest accrued to the loan causes it to exceed the policy’s cash value, the policy may lapse. If the loan is not paid back upon the policy owner’s passing, the loan amount plus any accrued interest is subtracted from the benefit paid to the policy beneficiary.

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