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How to Borrow From Whole Life Insurance
Whole life insurance provides an investment component that builds cash value over time, which you can access through policy loans. Like with any loan, interest will apply, though unlike with traditional bank loans there’s no credit check or need to verify income or employment before getting one of these policy loans.
Prior to borrowing from your life insurance policy, there are some key considerations you should keep in mind. Here are a few.
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Taxes
Whole life policies feature an interest-bearing savings component known as the “cash value.” Policyholders may access this savings portion via withdrawals, loans, withdrawals or loans and use it to cover college tuition costs, assist with financing a property downpayment or supplement retirement income; depending on the type of whole life policy this could also include paying taxes due on any excess withdrawal or loan beyond its basis; any such withdrawal or loan will incur income tax and surrender charges as per IRS regulations.
Financial advisers typically advise investing any excess premium payments rather than tapping the cash value of whole life policies, as the investment portion earns interest that is taxable as with any investment account.
Contrary to other investments, death benefit payouts from whole life insurance policies tend to be tax-free for your beneficiaries and thus provide significant estate planning advantages, particularly those with large inheritances. Furthermore, properly executed life insurance proceeds may help avoid probate proceedings and offer greater privacy than would otherwise be available via wills – something which is especially useful if there are children from prior marriages or divorces as it provides an opportunity to distribute assets without interfering with custody arrangements.
Whole Life Insurance Versus Term Life Insurance Information & FAQs
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Interest
Whole life insurance policies feature a savings component that builds cash value over time, with some whole life companies paying dividends regularly to contribute further to this total cash value figure. Policyholders can access this savings component at any time – an important aspect that differentiates it from term life policies.
Borrowing from your life insurance policy means incurring interest on the amount borrowed; however, this varies by insurer and is typically lower than what would be seen with traditional personal loans. Furthermore, repayment doesn’t need to be within a specified time frame like with other types of loans.
Bear in mind that an outstanding loan balance and interest will reduce the death benefit your beneficiaries receive upon your death. If it exceeds the policy’s cash value, this could cause it to lapse altogether and force it out of effect.
If this occurs, your beneficiaries could owe income taxes on the amount borrowed and you’ll likely incur a surrender charge to get back their remaining coverage amount. To prevent this scenario from occurring, always consult with either your life insurance agent or financial advisor prior to taking out a policy loan.
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Collateral
All types of life insurance policies can be used as collateral, with whole and universal life policies that build cash value being preferred by lenders. Paying dividends adds even greater appeal. Furthermore, using life insurance as collateral enables a borrower to avoid the usual qualification hoops that accompany other loans such as mortgages, personal loans and credit cards – such as credit checks and income verification requirements.
However, policy loans come with risks. If the interest owed on an outstanding loan goes unpaid, its entire balance and any cash withdrawals will be deducted from the death benefit that beneficiaries of your policy receive and can cause it to lapse altogether.
Most life insurance companies limit your borrowing to an amount equal to your adjusted cost base (ACB), which is determined by subtracting all premium payments minus any charges related to maintaining or operating your policy, such as net cost of pure insurance coverage.
Collateral assignment is a straightforward process that does not require credit or income verification; however, paperwork processing time varies by bank. If using life insurance as collateral instead, be sure to notify it first before taking out loans or making other changes to it.
Repayment
Most whole life policies that feature level premiums and guaranteed cash values enable policyholders to borrow against their cash value. Interest rates on such loans typically differ by insurer and can either be fixed or variable, while some providers charge a spread fee as part of the service they provide. If you fail to repay both loan principal and annual interest by its due date, the insurer will utilize your death benefit as payment against any outstanding balances owed to them.
Policy loans provide an appealing option for people with poor credit as they usually don’t require a credit check or collateral; making this borrowing option appealing. But borrowing against your life insurance policy will decrease its death benefit and impact your beneficiaries financially – therefore consulting a financial advisor before making this decision is vital.