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September 15, 2019

Borrowing against Whole Life Insurance: What to Consider

whole life insurance loan

If you have a whole life insurance policy, you might reach a point where you want to borrow against it.

What exactly does that mean?

To borrow against a whole life insurance policy means to take out a loan from it. Some benefits of doing this typically include being offered a fixed premium for the duration of the policy, guaranteed annual cash growth, and a guaranteed death benefit.1

How Does Borrowing Against a Whole Life Insurance Policy Work?

A whole life insurance policy doesn’t expire, as long as the premium is paid.1 In other words, it will last the lifetime of the insured.

The money that’s paid into the policy gets invested by the life insurance company2 and has a cash value benefit that increases over time. Since it happens over a period of time, this allows the owner to borrow against that cash value.

Whole life policies essentially have two values – the face value or death benefit, and the cash value. Once the death benefit amount has increased, the cash value usually can typically be borrowed against.1 Your policy is used as collateral for the loan by your insurance company.

Do Whole Life Insurance Policy Loans Affect Your Credit?

Policy loans usually don’t affect your credit and typically don’t require an approval process or credit check.2 Also, no explanation is required on how to use this borrowed money. This is because you’re essentially borrowing money from yourself.

Even though these loans don’t typically affect your credit, it’s still important to make sure your loan is paid back in a timely fashion.2 Unless you pay out-of-pocket, interest typically accrues, which puts your loan at risk of exceeding the policy’s cash value and leading to a lapse in your policy.

In the case that the insured person passes away before the loan gets paid back, the loan amount as well as any interest owed is subtracted from the payout to the designated beneficiaries who are set to receive the death benefit.2

The Pros and Cons of Borrowing from a Whole Life Policy

There can be both pros and cons when it comes to borrowing against a whole life insurance policy.

    Benefits of borrowing may include, but are not limited to:
  • It can be a quick and convenient way to get cash when needed2
  • As stated previously, typically, there’s no credit check3
  • Interest rates are usually low3
  • There is no timetable on when loans must be paid back3
    However, the downside of borrowing may include, but are not limited to:3
  • At first, there may be little to no cash value to borrow against
  • If you don’t repay the loan during your lifetime, your death benefit will be reduced
  • There’s always a risk of losing coverage, from interest sneaking up on you
  • Your policy can lapse if your loan plus interest exceeds your policy’s cash value
  • Potential tax consequences

Key Takeaways

Overall, borrowing against a whole life insurance policy can be a good alternative to running up a credit card balance or paying a significant amount of interest on a personal loan.3

It’s essential to keep up with your loan, because the costs can always come creeping back at you. Make sure to stay up-to-date with the accrued interest by creating your own plan for repaying your loan. Stick to your plan to pay your loan back fully, especially if your beneficiaries will need the full benefit.

If you have any questions you need answered, consult your insurance company or a local licensed life insurance agent for specific information regarding your policy and borrowing against it.

  1. InsureUOnline.org, Life Insurance: It’s More than a Death Benefit, 2019
  2. Investopedia.com, How Can I Borrow Money From My Life Insurance Policy?, 2019
  3. Nerdwallet.com, When to Borrow Against Your Life Insurance Policy?, 2017

Categories: Insurance, Life Insurance, Whole Life Insurance

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