{"id":3903,"date":"2023-10-30T15:06:14","date_gmt":"2023-10-30T15:06:14","guid":{"rendered":"https:\/\/businessyield.com\/ins\/?p=3903"},"modified":"2023-10-30T15:06:15","modified_gmt":"2023-10-30T15:06:15","slug":"life-insurance-loans-understanding-how-it-works","status":"publish","type":"post","link":"https:\/\/businessyield.com\/ins\/life-insurance\/life-insurance-loans-understanding-how-it-works\/","title":{"rendered":"Life Insurance Loans: Understanding How It Works"},"content":{"rendered":"

If you need money to fund a major expense or necessity, you may be able to take a loan out of your life insurance policy. If you have permanent life insurance, which includes whole life, adjustable life, variable life, universal life, and indexed universal life, you’ll likely have a cash value component you can access.<\/p>

One of the reasons some people buy cash-value life insurance is the potential to borrow money from the policy later on. When you bought your insurance policy, the insurance agent may have touted that you would be borrowing your own money and paying yourself back.<\/p>

Insurance agents and companies may promote loans as an easy way to receive tax-free money from your life insurance policy. However, policy loans are more complicated than they appear. While borrowing from your life insurance policy can be a quick and easy way to get cash in hand when you need it, there are a few specifics to know before borrowing. <\/p>

Most importantly, you can only borrow against a permanent life insurance policy, meaning either a whole life insurance or a universal life insurance policy.<\/p>

Life insurance policy loans need to be reviewed and monitored. If a policy loan is not monitored, a policy could slowly deteriorate, losing the minimum cash value needed. This can leave you with the unpleasant choice of making substantial loan repayments or having a large phantom income tax gain.<\/p>

What is a life insurance policy loan?<\/strong><\/span><\/h2>

Policy loans are available on most permanent\u00a0cash-value life insurance\u00a0policies. Life insurance policy loans are not the same as other loans: Policy owners are not required to repay the loan. Keep in mind that the insurance company will charge interest on the policy loan.<\/p>

If you borrow money from your\u00a0life insurance\u00a0policy, you are borrowing your own money. It is essentially an advance of money that could be received from the policy either through a surrender of the policy or the payment of the death benefit. It is money that you, or your beneficiary, would have received anyway. The policy\u2019s cash value acts as collateral for the policy loan.<\/p>

If you never pay back the policy loan during your lifetime, the amount is deducted from the death benefit when you pass away. This means that your beneficiaries will receive less and essentially repay the loan.<\/p>

How does a life insurance policy loan work?<\/strong><\/span><\/h3>

Life insurance policy loans are available on life insurance policies where there is sufficient cash value to borrow against. (Term life insurance\u00a0has no cash value.) The available loan amount will be a percentage of the cash value. You must pay interest on the policy loan.<\/p>

To initiate a policy loan, you\u2019ll need to contact your life insurance company. Before taking out a policy loan, find out what will happen to the components of your policy after the loan. You can do this by requesting an\u00a0in-force policy illustration\u00a0that will reflect the policy\u2019s value based on your plans\u2014whether you\u2019ll borrow more money, repay the loan or maintain the loan.<\/p>

A few things to note:<\/p>