Life insurance offers many advantages, which extend far beyond leaving money behind for your loved ones. In fact, you can enjoy lots of different benefits from the right life insurance policy while you’re still alive, including the ability to borrow from your life insurance plan. That’s precisely what we’ll explore in today’s article from Tenaya Insurance Services.
What Kind of Life Insurance Policy Allows You to Borrow Money?
There are many different types of life insurance and not every one has a cash value. Only certain types of life insurance have cash value and therefore, only certain life insurance policies allow you to borrow money.
Term life insurance is one of the more common, affordable types of life insurance but unfortunately, this type of policy does not retain any sort of cash value. Once the insurance policy term expires — up to 30 years from the date that the policy becomes effective — you simply part ways with the insurance company (assuming you are still alive. If you were to pass away during the term, then your family or another beneficiary would be compensated according to the terms of the policy.)
Permanent or whole life insurance policies, on the other hand, are a bit pricier on a monthly basis, but they typically do not have an expiration date and are good for as long as you choose to maintain the policy. This type of policy does carry cash value and as such, you can typically borrow against a whole life or permanent life insurance policy.
In the case of a whole life insurance policy, the insurance company typically takes your monthly payment and anything exceeding what is needed for the death benefit is usually invested, creating a cash value after a few years. The whole life policy usually has two values: the face value, or death benefit, and the cash value, which is more similar to a savings account. Once the cash value has started to build within the policy, you have the ability to borrow against it.
Notably, the policy loan is not taken out of the money put aside for death benefits, but borrowed against it with the insurance company using your policy as collateral for the loan. Also, you cannot borrow an amount that exceeds the cash value of the policy.
What Are the Requirements for Borrowing Against Your Life Insurance Policy?
The procedure for borrowing against your life insurance policy is usually fairly straightforward. Each insurance company has its own process and forms, but generally, it’s a quick and easy process.
Unlike a bank loan or credit card, borrowing against your insurance policy does not require any sort of approval process or credit check since you are essentially borrowing from yourself. When borrowing on your policy, no explanation is required about how you plan to use the money, so it can be used for anything from bills to vacation expenses.
Additionally, the IRS does not recognize the loan as income, so it is tax-free. It’s important to note that you will need to pay back the sum borrowed with interest, but the interest rates are usually far lower than those that you would see with a bank loan or credit card. Also, there is no mandatory monthly payment in most cases.
It’s important to ensure that your loan is paid back in a timely manner. Unless it is paid out of pocket, interest is added to the balance and interest will continue to accrue regardless of whether the bill is being paid off monthly. This can place your loan at risk of exceeding the policy’s cash value, resulting in a lapse in your policy. Insurance companies generally give many opportunities to keep the loan current so you can avoid a lapse. But if a lapse was to occur, you would be responsible for paying taxes on the cash value.
If you were to die before the loan was paid back in full, the remaining amount on the loan plus interest would be taken from the death benefit.
Turn to Tenaya Insurance Services for Your Life Insurance Solutions
Life insurance isn’t just for leaving money behind for your family after you die. There is so much more that can be achieved with life insurance, including tax benefits, retirement planning and benefits, funding cryonic preservation, saving for college, planning for a special needs child or other loved one, providing disability and income protection and beyond.
But finding the right type of insurance can be a challenge. This is exactly where Tenaya Insurance Solutions can assist, as we’re here for all of your life insurance needs and beyond.
Tenaya Insurance Services is here to meet all of your insurance needs. To schedule a phone consultation or live video chat, click here. You can also get started by completing our new client form. Or, contact Tenaya Insurance Services by clicking here to call 800.387.2567.