Why do so many opt for permanent life insurance over term life insurance, considering that term coverage is usually less expensive and has a simpler application process? First, permanent insurance last until your death (provided you don’t cancel the policy and you continue to pay your premiums). Term policies only last for a set amount of time, usually 10, 20, or 30 years.
How to get the cash value of a policy in multiple ways
For a variety of reasons, some of which we will address below, policy loans are frequently the recommended method of obtaining cash value. Before we proceed, though, you should be aware that there are usually three more ways to use a permanent life policy’s cash value:
Give Up
You can choose to terminate your coverage and get the cash surrender value. With this choice, however, you will no longer be covered by life insurance, and surrender fees—which can be substantial—will lower the amount of money you receive. Consequently, a lot of seasoned specialists believe that giving up before retirement should only be done as a last alternative, particularly in the event that you have no other insurance.
Removal
You can withdraw cash in a lot of circumstances. There are some drawbacks even though the money might not be subject to income taxes: depending on your policy, your death benefit will likely be decreased, possibly more than the amount removed. To learn more about the insurance company’s or your agent’s precise withdrawal guidelines, contact them.
You can pay your premiums using cash value.
In most cases, you can utilize the funds in your cash value to cover all or a portion of your life insurance premiums, keeping your coverage in place even when you don’t have enough money coming in from other sources. For senior policyholders who still wish to maintain their coverage but need to spend their retirement income for living expenses, this is a popular alternative.
loans for life insurance
Taking out a loan is the fourth method of accessing cash worth. You can borrow up to 90% of the total cash value from many insurers. The loan can be utilized for any purpose, and its interest rate is typically lower than that of a personal or home equity loan. It’s crucial to remember, though, that a lot of policyholders save this choice for instances in which they require “fast cash” that they plan to repay. Why? Because the death benefit of the policy will be lowered by the loan balance and any interest accumulated if the loan is not returned, you will receive a decreased death benefit. Additionally, there are situations in which the policy may lapse in the absence of debt payback. Thus, these loans, like the other options listed above, have benefits and cons.
Loans for life insurance: Benefits
No effect on your credit score
There is no need for a credit check or any kind of employment or income verification in order to obtain a policy loan. There is no approval process, assuming you have attained the required monetary value threshold. Alternatively, you submit a loan request form, and usually, you receive the money within a few days.
A reasonably priced funding source
Policy loans typically have lower interest rates than personal or even home equity loans.
Cash value keeps increasing.
A life insurance policy loan’s proceeds are not deducted from your policy. Rather, it’s a real loan from a connected company or the life insurance company that issues the policy. This implies that even if you have an existing loan, your cash value will increase (due to interest or investment profits).
Repayment can be made in whatever way you desire or not at all.
You are free to choose the loan payback plan that best suits your needs. Some policyholders want to make a single, large repayment, while others would rather make smaller, more frequent payments over time. Some may decide not to make any loan repayments at all, in which case the remaining amount will be subtracted from the death benefit.
You are still covered by life insurance.
The policy is unaffected and the death benefit is precisely the same as it was before taking out the loan if the loan balance plus interest is repaid in full and on schedule.
Life Insurance Loans: Possible Consequences
Loans might not be accessible right away.
Your cash value may not increase to a significant enough level for you to borrow against your policy for a number of years. You’ll need to go elsewhere for your loan if your cash value hasn’t increased to that point.
The death benefit is reduced by unpaid debt balances.
The amount that remains outstanding will be deducted from the benefit payout if you pass away before the loan is fully repaid. Put otherwise, your beneficiaries will get a lower payout.
There are instances where coverage might expire.
There’s a possibility that the loan amount plus interest will surpass the cash value of your life insurance policy if you don’t make timely loan repayments. Should that occur, the insurance provider may give up the policy, depriving you of any life insurance protection.
There can be tax repercussions.
You or your beneficiaries may be required to pay income taxes on the amount borrowed if you default on your loan, don’t pay back the balance, or let your policy lapse. Before taking out a loan, make sure to explore any additional possible tax ramifications with your financial and tax advisors, insurance agent, or company representative regarding life insurance loans.
Next Actions
If necessary, life insurance loans can provide policyholders with an easy and cost-effective alternative to obtain additional funds. Furthermore, there could not be any financial consequences if a policy loan is repaid in whole and on schedule. However, make sure to consult with a reputable tax and financial advisor, your insurance agent, or a representative of the insurance company before taking out a loan against your life insurance policy. They can assist you in weighing the advantages and disadvantages of each of your options, which include withdrawal, surrender, and loan. If you decide to take out a policy loan, be sure to pay special attention to the amount still owed: It could lead to the policy lapse, so you want to make sure it is not getting close to your cash value. That should not be a problem, though, if you make timely and sufficient loan installments.
Alternatively, perhaps you don’t have a permanent life insurance policy and would like to find out more about how it can help you accumulate wealth with tax benefits and offer lifetime protection. If so, you ought to consult a knowledgeable expert who can walk you through the ins and outs of both whole life and universal life insurance and assist you in determining whether either kind of coverage is a suitable fit for your financial requirements. Guardian can assist you in finding a local financial expert who will listen to your needs and help you choose the best option if you don’t already have one with whom to talk insurance.
Common inquiries concerning loans secured by life insurance
Do you have access to a life insurance loan?
Indeed. You will be eligible to borrow against your permanent life insurance policy after its cash value has reached a specific amount. This option is typically kept for times when policyholders need “fast cash” that they plan to pay back.
What is a life insurance policy loan?
You essentially borrow money from the insurance company when you take out a loan against your life insurance policy, using the cash value of the policy as security. No application, no credit check, and no approval procedure are involved. Although interest will be charged, it will usually be less than it would be for a personal loan or home equity loan.
Does purchasing life insurance require you to repay loans?
These loans are not your responsibility to pay back. But if the loan is not repaid, interest will keep adding up and eventually the policy’s death benefit will be lowered by the total of the loan and interest. Furthermore, there may be negative tax ramifications or the cancellation of your policy if the loan sum plus interest surpasses a particular threshold.
When is a debt secured by a life insurance policy due?
You can repay policy loans using a large lump sum payment, small, regular installments, or a mix of large and small payments, depending on which repayment schedule best suits your needs. Repaying the loan is another option. On the other hand, loan interest will keep accruing on the outstanding amount, which may lower the death benefit or maybe result in your complete loss of coverage. Furthermore, there can be unfavorable tax repercussions.
What may happen if you took out a cash loan under your life insurance policy?
Your death benefit and the status of your policy won’t change if you pay back the loan and interest in full. However, life insurance companies will lower the benefit payout if you haven’t paid back the entire loan debt and interest before passing away. Furthermore, you run the risk of having your policy cancelled and/or facing unfavorable tax repercussions if the loan sum plus interest reaches a particular threshold.