If you have a permanent policy, term plan, or whole life insurance with no medical exam-you might want to borrow from your life insurance for many different reasons. Some people need the money to cover medical expenses they didn’t expect. Others want a little cushion from college expenses that they might be taking on for their children. Then, a few might be seeking to pay off a mortgage.
Whether or not you can borrow depends on your policy, but you can already see that the benefit serves unique intentions. For instance, you might have chosen your policy so that you can replace the income lost-if you were to pass away-so that your family can stay comfortable and content as life moves on.
Of course, two-thirds of people actually choose life insurance to pass on their wealth to the next generation. They use it as a savings vehicle, an interest-earning financial tool, and also a lump sum payment guarantee. For someone in these categories, it might not be immediately clear how borrowing against their life insurance could further their purpose.
Explore whether borrowing against your life insurance policy makes sense for you and if it’s a possibility of the kind of policy that you have chosen. Knowing your options will open up opportunities for you to think strategically about how you might be able to overcome expenses or pass on wealth more effectively.
Words of Advice: Borrowing from Term and Whole Life Insurance Policies
You may need a new source of immediate income in many different situations, and it can seem like borrowing from your life insurance policy is a good choice. You might even think that since you have dutifully paid your premiums, some equity and value have built up. But, only some policies accumulate cash value, and borrowing is only an option for some.
See the reasoning for borrowing (or not borrowing) from your life insurance under two of the most common life insurance policy types. You’ll see that the answer to whether you should borrow is not always so clear and transparent.
Can I Borrow from Term Life Insurance?
Term policies stay valid and active only for a set number of years. This could mean that your policy is valid for 5 years, 10, years, or even 30 years, but the expiration comes after the decided number of policy years. People choose term insurance because they come with a lower premium and none of the complexity or conditions of other permanent policies.
Unfortunately, because these policies are more affordable, they don’t come with a cash value benefit, meaning there is nothing to accumulate worth and borrow against. The truth is that you can’t really borrow from a term policy.
Should I Borrow from Whole Life Insurance?
Whole life insurance lasts indefinitely until the policy benefits are activated by death. Whole life insurance is a very different kind of experience since it does come with a cash value component. As this policy type gathers value, it offers a few important advantages that you can access through your cash value policy feature:
- You can buy more coverage to pass on more wealth.
- You can pay off some premiums with proceeds.
- You can withdraw cash without needing to repay.
- You can borrow and use the cash value as collateral.
Clearly, borrowing from whole life insurance is a possibility opened up by its more complex policy features. Some even purchase whole life policies because of this option to borrow from the policy as they need. But, let’s consider some of the reasons you might want to borrow and why you really might not.
Advantages and Disadvantages of Life Insurance Borrowing
By borrowing from your life insurance policy, you can secure benefits that you won’t get from a bank. The borrowed amount won’t require a credit check—and, it won’t appear on your credit report. The interest rates are much lower than traditional credit cards and personal loans while the timetable for repayment is much more flexible.
By comparison, you might struggle with getting the payment since it takes years to grow enough cash value with the right policy. It will also reduce your death benefit payout if you intend to pass on the greatest wealth amount through guaranteed lump sum payments. Finally, you could lose the policy if there is too much interest on the loan.
Choose a Policy You Can Borrow Against
If you want to select a policy-and to think ahead-you can use smart tools to explore the insurance market with speed. Completely online, you can find policies, get quotes, and start applying with convenience.