Borrowing Life Insurance Policy Loans

Life insurance is one of the most important investments that you’ll ever make for the future of your family. If something tragic were to happen to you, then your family would be responsible for a massive amount of debt and other final expenses, and that’s where your life insurance coverage comes in. We know that finding the perfect life insurance policy can be difficult, but that’s why we are her to help. It’s our mission to ensure that you’re getting the perfect type of life insurance plan at an affordable rate. This article is going to explore whole life insurance and how you can borrow money based on your life insurance policy.

There are many different types of permanent life insurance policies that offer a cash value, savings, or investment component. These plans may include whole life, universal life, and variable life insurance. In these insurance policies, the cash or investments are able to grow over time, allowing the policy holder another way to potentially build a significant amount of funds for current or future financial needs.

In many cases, even the guaranteed interest rate that is associated with a basic whole life insurance plan is generally more than that of a bank savings account. When this is the case, the funds within the life insurance policy will typically grow much faster – and on a tax deferred basis – providing a nice source of available funds for use should the policy holder need the cash.

How Life Insurance Policy Loans Work

In order to borrow funds from a life insurance policy, it is important to first determine how much cash is available in the policy. Typically, this information can be obtained by checking the policy statement. It is important to note that policies that are less than five years old will rarely carry a significant amount of underlying cash value.

Typically, the agent on the policy – or a company representative – can help to process the policy loan request. In most cases, a policy holder will receive the loan proceeds in the same manner that he or she pays their premiums. For example, if the policy holder pays premiums via check, then the proceeds will be sent to them by check.

It is also important that a plan for repaying the policy loan be devised before the funds are even obtained. Although insurance companies are not usually aggressive about repayment of such loans, leaving an unpaid balance could lead to negative consequences such as a lesser amount of death benefit, or even an unintentional policy lapse.

Important Life Insurance Policy Loan Considerations

In addition to a plan for repaying the loan, there are several factors that a policy holder should consider prior to borrowing cash from his or her plan. These include:

  • Taxes – When a life insurance policy holder borrows against the cash value in their policy, it is not considered to be an actual distribution. This is because the amount that is borrowed should be paid back – with interest. Therefore, when such funds are borrowed, there will be no tax due on the portion of the funds that is considered to be gain. If, however, the cash value loan is not repaid, leading to a lapse of the policy, or if the policy is cancelled prior to loan repayment, then the policy holder will likely have some tax liability. Likewise, if the policy were to lapse due to borrowing too much from the policy, then the loan may be treated as being “forgiven” by the IRS. In this case, the funds will no longer be considered a loan but rather as ordinary income – and will thus be subject to ordinary income taxes.
  • Death Benefit – Should a policy holder borrow funds from their policy, and then subsequently pass away prior to repayment of the funds, then the amount of the unpaid loan balance will be deducted from the amount of death benefit proceeds that are to be received by the policy’s beneficiary. In this case, a lesser amount of death benefit could put survivors into a negative financial situation, depending upon how much they need for final expenses and other pressing debts.
  • Other Consideration – In addition, many insurance companies will require fees and/or administrative costs to the borrower when taking out a loan on their policy. It is important that the amount of these additional costs be factored into the overall equation.

Why Consider Borrowing from a Life Insurance Policy

While it is important to consider both the tax implication and death benefit considerations when borrowing funds from a life insurance policy, there are many viable reasons why a policy holder would want to do so.

First, these funds can provide a good way to pay off debt, without the need to use money from savings, investments, or other similar accounts. In some situations, the funds that are in a life insurance policy’s cash value may be the only source available to cover emergencies or other pressing expenses. This can potentially save an individual a great deal in interest charges and other fees if they would otherwise need to use credit for such instances.

Disadvantages of a Whole Life Insurance Plan

Whole life insurance policies are a great option for life insurance protection. Not only will they never expire, but you also have the ability to secure a loan based on the cash value of the plan. There are some disadvantages to these whole life insurance policies that you should be aware of as well. It’s important that you get the best plan to meet your needs.

The most notable pitfall of these plans is that they are going to be much more expensive than a term life insurance plan. Because these plans never expire, they are going to cost you more. If you’re looking for the most affordable life insurance policy, then a whole life policy is not going to be the best option for you.

Perhaps your concerns are because you have health conditions. Please keep in mind that the most reliable life insurance companies offer whole life insurance with no medical exam, so don’t let anything stop you from getting the coverage you deserve.

No Exam Whole Life Insurance

There are a lot of people that have been declined for insurance protection in the past, but that doesn’t mean that you can’t get whole life insurance. There are several companies that sell no exam whole life insurance. These no exam plans allow you to get the coverage that your family deserves without being required to undergo the health tests.  For anyone that is in poor health, these can be a great way to get coverage.

One of the most notable disadvantages of these no exam policies is that they are going to be more expensive than a plan that requires an exam. The purpose of the medical tests is to give the insurance company an idea of how much risk you are to insure. Without that medical exam, the company is taking a much greater risk, and they are going to offset that by charging you much higher premiums for your plan. If you want to get the most affordable life insurance plan, you’ll need to apply for a plan that requires those health tests.

If you’ve ever been declined for life insurance coverage because of your health or any pre-existing conditions, don’t assume that you can get affordable life insurance protection. There are several options that you can choose from to ensure that you’ve got excellent life insurance at an affordable rate. If you have any questions about whole life insurance or you want to get the best plan to meet your needs, please contact one of our experienced agents today.

Unlike traditional insurance agents, we are a group of independent insurance brokers, which means that we don’t work with one single insurance company. Instead, we work with dozens and dozens of highly rated companies across the nation, and we can bring all of the best insurance plans directly to you. There are thousands of companies on the market, which means that you could spend weeks calling different agents to find the best rates. Instead of wasting hours and hours, let one of our agents do all of the hard work for you.

You never know what’s going to happen tomorrow, which means that you shouldn’t wait any longer to get the insurance protection that your family deserves. Contact one of our agents today and we can get the process started. We can help you find the most affordable life insurance available to you.

About InsuranceScored.com
About InsuranceScored.com

Susan Wright holds a BA from Michigan State University and an MBA from St. Louis University. Having over 20 years of working experience in the insurance and financial services industry, she has trained more than 10,000 financial services representatives. Susan has had licenses in real estate, insurance, and NASD Securities, and she has earned nine industry professional designations, including CLU, ChFC, RHU, REBC, CSA, CLTC, CCFC, CSS, and ADPA. Read more about her on Google+

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