It may seem like a good idea to get some extra cash by borrowing against your life insurance. Learn about whether you should do it right here.
Borrowing against a permanent life insurance policy’s cash value is easy, as there are no loan qualifications or requirements. You can also use the funds for anything and pay it back when you want to, while there are lower interest rates to be concerned with a loan from a life insurance policy.
However, there is a downside, where if you don’t pay back the loan interest, you could have to pay a massive tax bill and lose your policy entirely. If you have the means to keep up with the payments, one of the easiest ways to access cash is borrowing against your life insurance policy.
Is It Worth Borrowing Against Your Life Insurance Policy?
A life insurance policy’s cash value is equal to the amount of cash you will get if you surrender the policy. Every time you will be paying premiums for a life insurance policy’s cash value, like universal or whole life insurance, a portion of the premium will be set aside for the policy’s cash value. The policy’s terms will set the interest rate that allows the cash value to grow over time.
If you acquired a permanent life insurance policy with cash value, it can be used as a guarantee for borrowing money from the insurance company. However, this will only become available when the cash value of your life insurance policy reaches a certain size, which could mean paying premiums for five to ten years.
What Amount Can You Borrow Against a Life Insurance Policy?
The amount you can borrow against a life insurance policy will depend on the insurance company. The maximum loan amount for a policy is generally 90% of the total cash value without a minimum amount. If you get a loan from an insurance policy, you won’t be removing any money from your account’s cash value. You can use the cash value as a guarantee and taking money from the insurance company.
That gives you a major advantage since the cash value will continue accumulating interest and remain in the insurance policy. There is no set time for paying back the loan, which is a requirement in other types of loans. However, if you don’t pay the insurance company their interest annually, which can be variable or fixed, that interest payment is going to be included in your borrowed loan amount.
The Size of Your Loan
You’ll have to think about compounding interest if your loan exceeds several years. If the total amount of the loan becomes as largeas your insurance policy’s cash value, you will lose your policy.
In that instance, you will lose the coverage you are getting and will have to pay a higher tax bill if the loan amount exceeds the premiums you have paid.
There is always some risk involved when you are borrowing against your life insurance policy. Therefore, it is advised to consider the size of the loan compared to the cash value of your policy and always make your interest payments on time.
You can also read: List of High-Interest Banks in the United States