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Loaning money against your life insurance policy is an efficient and quick way to gain cash quickly, but be wary of borrowing too much and accruing too much interest – if this balance exceeds the death benefit, your policy could lapse and your funds become unavailable.
Consult with both your financial planner and life insurance provider before considering taking out a loan against either a whole life or universal life policy.
We at Denis Doulgeropoulos – Omega Investments offer different life insurance plans.
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If you have poor credit and are searching for a personal loan, life insurance policies could provide funds you wouldn’t find elsewhere. Unlike traditional loans with their set repayment terms and fixed repayment schedules, life insurance policy loans offer greater flexibility – not to mention lower interest rates than unsecured loans – making this an appealing alternative solution for those with bad credit.
Note that permanent life insurance policies (whole and universal life) only build cash value and may be borrowed against. Policy loans reduce death benefits and should they go unpaid, may even cause your contract to lapse. Furthermore, interest will accrue on any outstanding balance for loans which isn’t paid back promptly by policy owners; any outstanding balance could then be deducted from death benefits payable directly to beneficiaries.
To determine whether your policy has enough cash value to allow a loan, it’s advisable to speak to either a licensed life insurance agent or contact the insurer directly. In general, most policies allow up to a percentage of original face value as borrowing limits; these may differ depending on your insurer.
Whole Life Insurance Versus Term Life Insurance Information & FAQs
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If you need money quickly, borrowing against your life insurance policy could be the way forward. Borrowing against it offers an alternative to bank borrowing while helping avoid taking on debt that might be hard to repay in dire times. Just keep these points in mind before going this route:
Borrowing against permanent life insurance policies that build cash value – such as whole life or universal life policies – is only allowed with those that build cash value over time, such as whole life or universal life policies. More common and cheaper term life policies do not contain cash value features.
Life insurance loans offer lower interest rates than banks and credit cards; however, any outstanding debt may reduce your death benefit amount.
Your policy’s cash value allows for up to 90% of loan borrowing capacity, without incurring a minimum monthly payment obligation or credit reporting hassles. Also, unlike traditional loans, policy loans don’t appear on credit reports nor require employment/income verification documents as with traditional loans; but keep in mind that any outstanding debt will accrue interest over time and if its total exceeds your policy cash value it could lapse altogether.
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Life insurance policies that have accrued significant cash value may offer an attractive alternative to consumer loans in certain situations.
Life insurance policies that lend out their cash value are exempt from taxes when used as funding for unexpected expenses or home down payments, because the IRS considers this money an additional payment towards the cost of maintaining the policy rather than income from it directly. As a result, they make excellent alternatives when looking for affordable funding solutions such as unexpected expenses or home down payments.
If you want to take advantage of this feature, make sure that your policy type allows it. Only permanent policies such as whole or universal life offer this feature; term policies do not. Also be mindful that loans from life insurance policies reduce death benefits while accruing interest – should this amount surpass its death benefit, the policy could lapse and you would lose everything!
How to borrow from life insurance The easiest way to find out whether or not your life insurance policy allows borrowing is to contact the insurer or agent directly and request documentation of its current cash value. In many cases this information will also be accessible online by logging into your account on their website.
Borrowing from whole life insurance generally has no adverse impact on your credit. Unlike bank loans, however, policy loans do not need to be paid off within an agreed-upon time frame and do incur interest; depending on the insurer and contract terms this could either be fixed or variable rates; but in any case typically accrued interest is usually less than what would accrue through credit cards or bank loans.
Typically, whole life policies with cash value accumulation allow for up to 90% borrowing on total cash value; however, borrowing may reduce death benefits as loan amounts and interest accumulate over time. When considering taking out a loan for any reason it’s essential that it makes sense in your circumstances and seek an in-force illustration from your insurer so they can demonstrate how the loan affects future performance of your policy.
Overall, borrowing from whole life insurance can be an ideal solution for people in need of cash quickly and don’t want to go through the hassle of applying for traditional loans or credit cards. However, this option only applies for permanent (whole or universal) policies; term life policies don’t build cash value like permanent policies do and thus are more affordable and suitable options. Also note that any late payments of policy loans could reduce death benefits as well as cause the policy lapse altogether.