Borrowing from Whole Life Insurance is a financial strategy that can provide you with quick and easy access to cash when you need it. However, it’s essential to understand the specifics of this process before you decide to borrow against your policy.
Understanding Whole Life Insurance
Whole life insurance is a type of permanent life insurance that provides lifelong coverage for the policyholder. A portion of each premium payment goes towards building cash value in the policy. This cash value can be borrowed against over time, providing added flexibility and financial security.
Policies You Can Borrow From
You can only borrow against a whole life insurance policy or a universal life insurance policy. Term life insurance, a cheaper and more suitable option for many people, does not have a cash value. It is designed to last for a limited period of time, which is generally anywhere from one to 30 years. However, in some instances, a term life policy can be converted to a permanent policy in which cash value can build.
How a Life Insurance Loan Works
Unlike a bank loan or credit card, policy loans do not affect your credit, and there is no 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 to a financial emergency.
Pros of Borrowing from Your Whole Life Insurance Policy
Borrowing from your whole life insurance policy has several advantages, including:
- Low-interest rates: Generally, loans taken against a whole life policy have low-interest rates compared to other types of loans.
- No credit checks or applications: Since the loan is secured by the cash value in your policy, no additional collateral or application process may be necessary.
- Tax benefits: Loans taken against your whole life insurance policies do not count as taxable income.
Considerations Before Making a Decision
Before deciding whether or not to borrow from your whole life insurance policy, here are some factors worth taking into account:
- Reducing death benefit payout: Taking out a loan decreases the amount paid out when a claim is made after death.
- Potential impact on future dividends growth: Borrowed funds will reduce any potential earnings on those funds and therefore could decrease dividend growth which affects investment performance in the long run.
- Repayment terms: Depending on how long it takes for you to repay borrowed funds will affect dividends payouts.
Conclusion
Borrowing against your whole life insurance can provide additional financial security during tough times. However, careful consideration should be given while evaluating the pros and cons associated with these loans. It’s always recommended that individuals seeking such types of financing first speak with their chosen financial advisors.
