Whole life insurance is a type of permanent life insurance that offers lifelong coverage for the policyholder. A portion of each premium payment contributes to building a cash value in the policy, which can be borrowed against, providing added financial flexibility and security.
Policies Eligible for Loans
Loans can only be taken against whole life insurance or universal life insurance policies. Term life insurance, often a more affordable and suitable option for many, does not build a cash value and is therefore ineligible for loans.
How Life Insurance Loans Work
Unlike traditional bank loans or credit cards, policy loans do not affect your credit score, and there is no approval process or credit check involved. This is because you are essentially borrowing from yourself. The loan can be used for any purpose, from bill payments to vacation expenses or financial emergencies.
Advantages of Borrowing from Your Whole Life Insurance Policy
Borrowing from your whole life insurance policy offers several benefits:
- Low-interest rates: Loans taken against a whole life policy generally have lower interest rates compared to other types of loans.
- No credit checks or applications: The loan is secured by the cash value in your policy, eliminating the need for additional collateral or an application process.
- Tax benefits: Loans taken against your whole life insurance policies are not counted as taxable income, as long as the policy remains in effect.
Considerations Before Making a Decision
Before deciding to borrow from your whole life insurance policy, consider the following factors:
- 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 could decrease dividend growth, affecting investment performance in the long run.
- Repayment terms: The length of time it takes to repay borrowed funds will affect dividends payouts.
Conclusion
Borrowing against your whole life insurance can provide additional financial security during challenging times. However, it’s crucial to evaluate 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.