How Much Can I Borrow From My Life Insurance Policy?
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Say your kid is heading off to college and you need to pay part of their tuition. Or you decide you’re ready to take the plunge and start your own business. If you don’t know where to get the money, the most natural place to start is at the bank. But sometimes the process of getting a personal loan is difficult, and the associated interest rates can be incredibly high.
There is one angle that you may not have considered, though: you could look to your life insurance for a loan.
If you have permanent life insurance — meaning universal life insurance, whole life insurance, or variable universal life insurance — you can actually borrow against these policies. Going down that route can be a relatively easy and straightforward way to get cash fast. Still, there’s no such thing as a free lunch, so read more below before calling your agent!
First things first, if you want to borrow from your life insurance policy, you have to have a permanent life insurance policy. A permanent policy builds cash value over time, part of which comes directly from your premium payments. The good news is that the cash value will keep growing based on the interest rate stated in your contract — so your little piggy bank is getting fatter every day. The even better news is that this fund is tax-deferred and can be treated like a savings account.
This isn’t to say there aren’t tax implications (there are!), and you’ll want to consult your accountant or insurance agent. Because as Ben Franklin told us, “In this world, nothing is certain except death and taxes.”
As your permanent life policy accumulates cash value, you can borrow money from the insurance provider by using this cash value component as collateral — within the stated stipulations of course.
Many insurance providers will let you borrow up to 90% to 95% of the cash value. For example, if your policy cash value is $75,000, you can borrow $67,500 to $71,250.
No minimum amount applies, and often, interest rates are lower than what they would be at a bank. In essence, you’re taking a loan out from your insurer using the cash value of your policy as collateral. If you fail to pay the insurance company back, they’ll simply take the cash value already associated with your policy and use that to pay themselves back.
A cash-value loan is an easy way to get money quickly, without having to deal with the endless paperwork of a longer application approval process. When used correctly, a loan on your permanent life insurance can be fast and low-interest.
That said, there are risks involved, so before you apply for a loan against your life insurance cash value, here are some things to keep in mind.
No credit check required: With a cash-value life insurance policy, you are actually borrowing your own money, so you don’t have to undergo an approval process, formal credit check, or income verification.
No fixed repayment schedule: You don’t have to repay your loan within a set time period. No formal timeline applies — so depending on your budget and cash flow, you can make payments on your own schedule.
Low-interest rates: Typically, policy loans offer lower interest rates than bank loans. Depending on whether it’s fixed or variable, the loan interest rates normally hover between 5% and 8%.
Cash value grows over time: Your policy’s cash value will keep growing over time. The cash value serves as loan collateral, but the cash value is still technically invested with the insurer — so it will continue to build up and gain interest.
Limited borrowing amount: The amount you can borrow is limited based on the cash value itself, and how much of it you’ve accrued to date.
Minimum cash value required: In order to borrow from your life insurance policy, you need to have built up a sufficient cash value. Policyholders can only borrow from their life insurance policy once the cash value reaches a minimum contracted limit. This usually takes anywhere between 5 and 10 years of paying insurance premiums.
Reduced death benefit: Failure to pay the annual interest will be added to your outstanding loan amount. Likewise, the policy’s death benefit paid out to beneficiaries will be reduced if you don’t pay back the loan on your life insurance.
Risk of policy lapse: Even if no formal payback timeline or repayment schedule applies, the loan amount will continue to accrue interest payments. The policy will lapse if the outstanding loan balance exceeds the cash value. This can affect the tax-deferred status. (The IRS considers policy loans tax-free as long as your loan amount does not exceed the total amount of premiums you paid for the policy.)
Only certain types of life insurance policies offer a cash value component. If this is something you’re looking for, but you’re not sure where to start, check out Marble, where you can shop for policies and compare quotes, all while earning rewards on your insurance. Sign up for Marble today.