Can I borrow against my life insurance policy?

Can You Really Borrow Against Your Life Insurance?

Ever wished you could tap into that life insurance policy you’ve been paying for? Well, you might be in luck! Borrowing against your life insurance is a little-known option that could provide a handy cash infusion.

What is Borrowing Against Life Insurance?

In simple terms, it means taking out a loan using the cash value of your permanent life insurance policy as collateral. Permanent policies like whole life and universal life build up a cash reserve over time that you can borrow against.

Think of it like a home equity loan, but instead of using your house as collateral, you’re using the cash value of your life insurance policy. The insurance company essentially lends you money from the policy’s cash value, and you pay it back with interest.

How Does it Work?

Let’s say you have a whole life insurance policy with a $100,000 death benefit and $20,000 in cash value built up over the years. You could potentially borrow up to $20,000 from the insurance company, using that cash value as collateral.

The loan accrues interest, just like any other loan. But here’s the kicker – the interest rate is usually pretty low since the cash value is already the collateral. Plus, you only pay interest on the outstanding loan balance, not the full amount borrowed.

3 Surprising Facts About Borrowing Against Life Insurance

1. It Won’t Affect Your Credit Score: Unlike a traditional loan, borrowing against your life insurance doesn’t involve a credit check or impact your credit score.

2. You Can Borrow for Any Reason: Need to fund a home renovation, pay for college, or cover medical expenses? You can use the loan for pretty much any purpose.

3. The Loan is Tax-Free: Since you’re borrowing against your own cash value, the loan proceeds are not considered taxable income.

A Few Caveats

While borrowing against life insurance can be a handy option, there are a few potential downsides to keep in mind:

• Interest Charges: You’ll have to pay interest on the loan, which can add up over time.
• Reduced Death Benefit: Any outstanding loan balance at the time of your death will be deducted from the death benefit paid to your beneficiaries.
• Policy Lapse Risk: If the loan balance grows too large relative to the cash value, your policy could potentially lapse.

Learn More

• Permanent Life Insurance: Policies that build cash value you can borrow against.
• Term Life Insurance: Affordable coverage for a set period, with no cash value to borrow.
• Retirement Income Strategies: Using life insurance as part of your retirement planning.