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How Soon Can I Borrow From My Life Insurance Policy?

Deciding whether to borrow against your life insurance policy is a complicated decision. Before choosing when and how much to borrow, it’s best to seek further information from experts like your attorney, a financial advisor, or a certified public accountant to avoid losing your life insurance.

If you’re a life insurance policyholder, you may wonder: “How soon can I borrow from my life insurance policy?” The answer to that question depends on various elements, such as the type of life insurance policy you have, the amount of the outstanding loan balance, and the interest rate. However, with the various life insurance policies available, deciding on the right policy option is challenging for many individuals.

Depending on how quickly you want to borrow from your current life insurance policy, there are a few factors and benefits to consider when exploring your options. This article describes everything about borrowing from your life insurance policy to help you make the best decision when choosing a policy to suit your needs.

What is Cash Value?

Before determining whether to borrow from your life insurance policy, you must know crucial factors that will undoubtedly influence your decision, such as your cash value. Cash value is a crucial component of life insurance policies that influences many policyholders’ decisions on which option to select and provides guidelines for how this loan works.

Permanent life insurance policies, such as whole or universal life insurance, accumulate cash value, which describes the amount of money that the policyholder can withdraw from their policy. These funds can cover long-term care expenses and may vary depending on income taxes.

With permanent life insurance options, you accumulate cash value whenever you pay a premium. A specific amount of each premium is dedicated to building a cash value that you can eventually borrow.

Types of Life Insurance Policies

While there are variations of life insurance policies, they typically fall under two categories: term life insurance and permanent, or whole, life insurance. Both options have specific benefits and potential drawbacks to consider before making your final decision. Consider the following factors of term and permanent life insurance to make an informed choice.

Term Life Insurance

Term life insurance is the simplest option to provide financial protection for a specific period. This type of policy does not include a cash value component, which means you cannot borrow against it. However, term life insurance is more cost-effective and affordable than permanent life insurance policies, which makes it more suitable depending on your financial situation.

The policyholder receives coverage for a set time with term life insurance, provided they pay premiums. Policyholders can also lock in their rate for the term to help budget and maintain an affordable policy.

Though you can renew this life insurance policy once the initial term ends, you will likely be restricted to renewal on a year-to-year basis rather than an equal-length term period.

Permanent Life Insurance

This type of life insurance includes a cash value component, making it ideal for individuals looking to borrow against the accumulated cash value of their insurance policy. Permanent life insurance allows you, as the policyholder, to borrow from your policy when there is sufficient cash value to take out a loan. There is no specific length of time that building up cash value takes, though some policyholders may spend years or decades building up enough to borrow.

Variations of permanent life insurance include the following:

  • Whole life insurance: The first type of permanent life insurance is whole life insurance and offers coverage for the policyholder’s entire lifetime. Whole life insurance has a savings component with a fixed interest rate to accrue cash value over time. This policy allows you to withdraw a loan from your cash value funds which can be paid back as it earns interest. If the policyholder passes before paying back the loan amount, the excess amount is taken from the beneficiary’s payout.
  • Universal life insurance: Universal life insurance covers the policyholder’s whole life but comes with specific benefits and features not found in whole life insurance. Universal life insurance allows the policyholder to remain flexible with the policy’s death benefit, and its cash value interest rate is not fixed. This policy has the potential to develop into a zero-cost policy.
  • Variable life insurance: This permanent life insurance option is riskier than other policies. It contains a variable cash value that fluctuates depending on your payments and investments’ performance.
  • Final expense life insurance: The final variation of permanent life insurance, known as final expense life insurance, is a permanent policy that covers the policyholder’s end-of-life expenses. These expenses could include funeral and burial costs, medical bills, or unpaid debt.

How Soon Can You Borrow Against a Life Insurance Policy?

Most policies will include a provision for borrowing against the policy’s cash value, but the terms and conditions may vary by life insurance company. To borrow from your policy, you must contact your insurance company to find death benefit and determine your policy’s death benefit and cash value. This factor largely depends on how quickly you accumulate a fair cash value for the policy’s death benefit.

What are the Benefits of Borrowing Against My Life Insurance Policy?

As with any significant insurance decision, some pros and cons could influence your policy selection. While borrowing against your life insurance policy will come with some potential downsides explained later on, there are numerous benefits to borrowing against your policy. For instance, below are some primary benefits and reasons for policyholders choosing to borrow against a permanent life insurance policy.

  • Once cash value is accrued, policyholders can borrow against their policy at any time, no matter the reason.
  • Borrowing against your life insurance policy doesn’t impact your credit score since you are not borrowing from a financial institution but from your funds, meaning your credit card is not affected.
  • These loans do not require a credit check for approval and come with no qualifications that could influence the situation.
  • The loans are often more affordable than a typical bank loan.
  • Life insurance loans have low-interest rates.
  • These loans can be paid off at any time.
  • You can add various policy riders to your plan for additional coverage, such as an accelerated death benefit to access your death benefit while alive to cover unforeseen expenses

What are the Downsides of Borrowing Against My Policy?

Though there are numerous benefits to borrowing from your life insurance policy, this process has a few downsides. For instance, consider the following before borrowing against your insurance policy:

  • You might be taxed on the borrowed cash value if you cannot pay back the loan.
  • Loans you withdraw from your life insurance policy will accrue interest over time.
  • Your death benefit may be damaged if you do not repay the loan or the loan balance becomes unmanageable.

How Much Can I Borrow From My Life Insurance Policy?

While the answer to this depends on your insurance company, most organizations allow you to borrow up to 90 percent of your accumulated cash value. There is no minimum amount of funds you can borrow when taking a loan from your insurance policy; however, it is essential to remember that, with this option, you are taking a loan from your insurer and essentially offering collateral in the form of your cash value.

How Can I Use Cash Value?

Once you have built a sufficient cash value for your life insurance policy, you can use the value in numerous ways. For instance, many policyholders use their cash value in the following ways:

  • Buying more coverage to boost their death benefit
  • Withdrawing cash to cover necessary funds and emergency expenses
  • Paying premiums for your policy
  • Support your retirement plans
  • Sell your insurance policy
  • Surrender your policy for cash

How to Build Cash Deduction From a Life Insurance Policy

Life insurance policies are typically not cash-deductible, and the IRS considers life insurance an optional expense. However, there are specific situations where a cash deduction from your life insurance policy is possible, such as the following:

  • Your employer pays for your life insurance premiums and is eligible for deductions
  • Your policy may be deductible if you have alimony and other spousal agreements made before 2019

The Steps of Borrowing From Your Life Insurance Policy

While insurance companies might have unique steps to take out a life insurance loan, the process generally involves a few core elements. Below is an overview of how borrowing against your life insurance policy typically works and what to anticipate as you approach this process.

  1. Inform your insurance company that you want to borrow money from your policy up to the allowable limit and explain where to send the money.
  2. Your insurance company will provide a check or wire transfer of the funds within a few days.
  3. You will be charged interest, which is added to your current loan balance.
  4. Depending on your insurance company, you may earn the same policy growth rate that you would if you didn’t take a loan; however, this is rare among most insurance companies.

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