Borrowing Money against Your Life Insurance Policy
There are going to be times when you are strapped for cash no matter what you do. Sometimes you do not have the credentials to obtain a typical bank loan, or your only options for a loan carry absurd rates of interest. Whether you need extra money for repairs around the house, a new low-risk investment opportunity, or just one of many emergencies that life throws at you, sometimes you just need some fast money, and you need it now.
Knowing how to borrow money from your life insurance policy is one of the keys to securing a great financial future for both you and your beneficiaries. Read on to discover the exact process of procuring a loan against your life insurance policy, as well in order to assess the ultimate risks and benefits associated with taking out money against your own assets for both you and your family.
Double check what type of life insurance policy you own
Most permanent life insurance policies do allow you to borrow money, but not all do. Thus, you definitely need to figure out what kind of plan you operate under. These are the most common types of permanent life insurance.
- Universal life insurance: Universal life insurance (also commonly referred to as “adjustable life insurance”) allows you to lower or raise your death benefit. Once you have made your first payment, it also lets you pay off your premiums on a flexible time schedule in as large or as small of an amount as you can afford.
- Variable life insurance: Since the greater amount of your initial premium is generally placed in either one or more accounts for investment purposes -- namely in a mutual fund, bond, or stock -- this enables you to maximize your life insurance policy’s overall value.
- Whole Life Insurance: This type of life insurance enables you to pay a stable amount of money for a premium in order to take advantage of the death benefit.
- Variable Universal Life Insurance: Variable Universal Life Insurance provides policyholders with the ability to easily increase the levels of their coverage.
It is a lot less expensive and much more flexible to take out loans against your life insurance policy due to the lack of red tape surrounding the process. Make sure that your unique insurance policy actually allows you to take out a loan. Before you consider anything else, make sure there is indeed a provision in your policy that enables you to take out a loan.
How can you do this? Call or somehow otherwise contact your life insurance agent in order to receive this information. Generally speaking, you should be able to take out a loan against most permanent insurance policies due to their cash surrender value.
However, term life insurance policies will not allow you to take out loans, as they do not retain any sort of value that enables you to take out money or borrow against them. Keep in mind that only the actual owner or policyholder of the insurance policy in question is allowed to borrow money against the policy; unfortunately, beneficiaries cannot independently do so unless or until they are recognized as co-owners by the policy.
Make sure that your policy actually retains a high enough value for you to take out a loan
This is paramount. While you should be able to verify this through your life insurance company’s website or through your life insurance agent, you may need to check up on this in person.
That being said, you can generally borrow money against your life insurance policy in the same way that you borrow money against your credit card -- with a maximum amount up to the stated cash value that you have within your account, but that is simply a general rule of thumb; many companies may retain their own specific guidelines.
Keep in mind that because your insurance policy’s cash value may increase at a snail’s pace in the first few months or even years, you usually will not be able to take out loans against it for a long time.
Get in touch with your company in order to procure the correct paperwork
This is the first physical step that you need to take in order to start the process of borrowing money against your life insurance policy.
While in some cases you may need to go to your company’s offices in person, you may also be able to find the forms online or call your agent and have them send them to you via email or snail mail.
However, you may even be able to obtain the loan over a phone call; some insurance companies allow their policyholders to carry out the procedure via a phone call in instances when the loan amount is $25,000 or under.
Remember to correctly name the primary holder of the life insurance policy
In many cases, the information necessary in order to accurately complete the loan application strictly relies upon whether the policyholder is a business, a trust, or an individual person.
You will most definitely need to show the holder’s contact information, including a phone number, physical address, and email address, in addition to -- in the case of an individual rather than a trust or a business -- a social security number or -- in the case of a trust or business rather than an individual -- proper tax identification forms.
Choose how you want to receive your money
This is typically information that you will fill out on your initial form; it will very likely require you to put down the method in which you want to receive your money. So what is the best way for you?
This will ultimately depend on the reasons why you are borrowing money against your insurance policy in the first place. You will generally be asked whether or not you would like to receive your money by a check or whether you would like the amount of the loan to be paid in the form of a premium in the future.
Many policyholders choose the latter option if they do not immediately have the amount of money necessary to pay their premiums out of their own pockets. The former option to receive the money through check usually takes a little longer -- with the check generally arriving within five or even ten business days, which can add up to nearly two total weeks or more -- and is not a bad option to take if you can afford to wait and prefer the “traditional” security of depositing a check into your bank account.
Make sure that you track the money that you borrow
It is true that one of the many benefits of taking out a loan against your life insurance policy is that you have no deadline to race against in order to pay it back. However, this means that it can be very easy to have the repayment slip your mind. If anything can motivate you to pay your loans back on time, it should be the ultimate reminder that you are borrowing money against investments in your and your beneficiaries’ future.
Therefore, it is imperative that you regularly and consistently check your balance, particularly relative to the actual cash value. You absolutely do not want the amount of money that you take out to be greater than your insurance policy’s value; this can get your policy canceled. In addition, you should not forget to pay the interest back; the sooner you do this, the less likely you are to face increasing interest payments.
Furthermore, it would be in your best interests to create a schedule to pay back your loans -- and stick to it. Remind yourself of the cons of not paying back your loans in a timely manner, or even reward yourself for sticking to loan repayment plans if that is what it takes.
Remember: if you do not pay the money back before you pass away, the beneficiaries of your plan will ultimately only receive whatever cash is left in the bank. If for no other reason but your beneficiaries’ financial well-being past your existence, make sure to pay the loans back as quickly as possible so that they do not suffer.
Check the pros and cons of taking out a life insurance loan against your policy
There are going to be a wide variety of reasons both for and against your borrowing money against a life insurance policy as opposed to taking out a loan through a more traditional route. However, some of these reasons can prove to be a good thing. It is definitely cheaper than taking out a “standard” loan, as well as more flexible.
For instance, there is no measurable process to grant you approval; there is no verification of your income or any sort of credit check since you are generally borrowing money against your own future assets. Furthermore, there exists no mandatory monthly installment or payment timeline, as there is no exact deadline for paying back the money that you borrow.
The loan’s balance is ultimately taken out from your death benefit amount that otherwise is given to your legal beneficiaries, meaning that the onus of paying back those assets is ultimately on you. In addition, borrowing money against your life insurance generally ensures an extremely low rate of interest in comparison to the typical loans that you would take out from the bank.
Finally, many banks will highly police the general process of your borrowing money, but an insurance policy loan will not do so. Think of it as the difference between a “cool parent” and a strict one.
Make sure that you consider the cons of taking out a loan against your life insurance policy
When it comes to borrowing money, there is no such thing as a completely risk-free route to go. As mitigated as the risks are when it comes to borrowing money against your life insurance policy, they are not completely invisible. Here are a few of the risks involved with borrowing money against your policy:
The insurance company is always watching you. Should you fail to pay back the loan in addition to the interest in a timely manner, the company will generally place that added amount to your policy.
Keep in mind that life insurance policy loan interest operates on a compound rather than a simple scale, meaning that the interest rate that you initially start out with will end up being much higher if you put off the payment for a long enough time.
Furthermore, the payments for your beneficiaries that the insurance policy provides will become smaller and smaller for as long as you do not pay it back in full. Once again, if for no other reason than the long-term benefit of the people on your life insurance plan, you should pay back the loans as fast as you possibly can.
If your insurance policy fails, you are forced to return the entirety of the loan all at once and you cannot pay it back in easy, convenient installments, either. In order to prevent this from happening, you must keep the amount of money that you borrow in amounts under the cash value of your life insurance policy.
Take into account the ultimate risks in terms of taxation
This is one of the biggest advantages of borrowing loans against your life insurance policy as opposed to taking out money from a bank or some other more traditional route.
The insurance policy proceeds are, generally speaking, not taxable in most situations but only just as long as the amount of the loan is less than or equivalent to the policy premiums that you have already paid.
If your life insurance policy fails, the Internal Revenue Service (IRS) will name your remaining balance -- including the interest payment -- as accountable for taxation. However, this policy only applies to the difference between your outstanding balance and the loan balance. This is a rare occurrence, of course; this usually only happens if your loan proceeds end up going over the cash surrender value.
You must take into consideration whether or not the cash value of your current life insurance plan is sufficiently armored against debtors and creditors. At the end of the day, when you take out a loan against your life insurance policy, the value of the money that you borrow is leaving a fortress and is not protected by the company or your policy any longer.
Unfortunately -- as your agent will be quick to tell you -- most insurance companies cannot give you a definitive answer as to the nature of how fast or slow the cash value of your plan will go up. In this vein, it is difficult to determine at exactly what point your insurance plan will become eligible for you to begin borrowing money against it.
While the guidelines that we are offering you above are fair game, for the most part, most insurance companies will retain their own specific rules regarding how specifically to take out money against their own particular plans.
Knowing how to borrow money from life insurance policy is a significant step towards securing your financial future. Everyone needs some extra cash now and again, but taking out loans is a risky business and sometimes, borrowing against your own assets is the most secure way to go, as well as the most surefire way to ensure that you have enough money for your needs. Armed with this knowledge in mind, you can look forward to a happy and healthy financial future that benefits both you and your family.