Can I Borrow Against My Life Insurance Policy?

Did you know that in some cases you can borrow against your life insurance policy? This article will discuss borrowing against life insurance policies, how this is done, when it makes sense, and what are the advantages and disadvantages.

If an individual has a whole life insurance policy and there is cash value accumulated, then they have the opportunity to borrow against the policy. There are several distinct advantages to borrowing against a life insurance policy:

• Low interest rate: interest rates when borrowing from a life insurance policy are often lower than other sources; current rates can be much lower than traditional loans through banks. Special circumstances may allow a net 0% loan.
• Flexibility in repayment terms: because you are borrowing against yourself there is no time limit for repayment, something that isn’t an option when borrowing from a bank or other private entity.
• No qualifications to borrow: when you borrow from your life insurance policy you do not have to provide any income verification or credit score, since you are essentially borrowing from yourself.
• Can borrow for any reason: the loan can be used for any purpose, whether it is for education, purchasing a home or car, or as a source of funds in the event of loss of income.
• No tax implications: you do not have to pay when you borrow against your life insurance policy.

There are a few drawbacks to borrowing from life insurance.

• Non-repayment impacts your policy death benefit: if for any reason you don’t repay any portion of your loan, that amount is taken off of your beneficiary’s death benefit.
• Policy cash value affects how much you can be loaned: you may only borrow up to a certain amount or percentage of your policy’s current cash value, so if the policy is relatively new and/or you might not have enough to borrow from.
• Accessing the cash value may cause additional premiums to keep the policy in force.

And there are some additional considerations when borrowing against a life insurance policy.

• There might be better sources to secure funds: more liquid accounts like cash reserves or brokerage accounts should be accessed before a life insurance loan.
• Work with a professional: as with any large financial decision, you should always first speak with your financial advisor to review your options. 

Article by Erick G. Colon.

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Life insurance permanent policies contain exclusions, limitations, reductions of benefits and terms for keeping them in force.  Accessing cash values may result in surrender fees and charges, may require additional premium payments to maintain coverage, and will reduce the death benefit and policy values. Loans are income tax free as long as policy is not a “modified endowment contract” (MEC) and policy must not be surrendered, lapsed, or otherwise terminated during the lifetime of the insured, and withdrawals must not exceed cost basis. Partial withdrawals during the first 15 policy years are subject to additional rules and may be taxable. Excess policy loans can result in termination of a policy.  A policy that lapses or is surrendered can potentially result in tax consequences. You should consult a qualified tax professional for tax advice on your own personal situation. 

Erick Geraldo Colon is insurance licensed in the states of: MA, NH, NY, NC, RI and TX. 230 Third Ave., 6th Floor, Waltham, MA 02451, 781-966-2980.

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