Life Insurance Loans: How Do They Work?

One phrase that is commonly used in the industry is life insurance loans. We take a look at the specific details regarding life insurance loans and how you can use these unique financial assets to improve the overall dynamic of your portfolio.

What is a life insurance loan?

Life insurance loans are fairly straightforward. As time goes on, a universal life insurance policy will (also known as a whole life insurance policy) accumulates what is known as a cash value. Once your cash value has grown to a large enough size, you will have the option to borrow from it as needed. This is what is known as a life insurance loan. Though you will no longer be earning interest on the money you borrow from your policy (until it is paid back, at least), these loans can be still quite useful depending on your financial needs.

What kind of life insurance policies allow you to borrow from them?

Life insurance is something that can be quite valuable to people of all kinds. However, there are many different types of policies that are currently available. If you are hoping to find the policy that is best for you and your family, it is very important to understand the differences between them.

There are two primary categories of life insurance policies. Term life insurance only covers you for a limited amount of time and does not have a cash value associated with it. Universal life insurance is permanent and has a cash value.

Only universal life insurance policies will give you the option to borrow from them. This is one of the primary reasons that these policies usually have higher monthly premiums.

When is it okay to begin borrowing from your life insurance policy?

Though you are allowed to begin borrowing from your life insurance policy as soon as you have accumulated any sort of cash value, it is generally a good idea to wait as long as you feasibly can before borrowing.

The cash value return on your policy is heavily weighted towards the future. This means that if you borrow too early, you will lose many of the benefits of having purchased the policy at a young age. Usually, it is recommended that you wait at least 10 years before dipping into your cash value. However, as is almost always the case with life insurance policies, there are obviously many exceptions to this general rule.

When does it make sense to utilize a life insurance loan?

Though your cash value is certainly yours to claim, you should not treat is as a casual line of credit. However, there are still many situations in which a life insurance loan makes sense.

• You cannot qualify for an ordinary loan (and you currently need cash)
• You cannot afford your premiums and you do not want to lose any coverage
• All available lines of credit have an interest rate as high as the interest you are earning
  on the cash value portion of your policy
• You are in a financial emergency and need cash quickly

Naturally, there are pros and cons to every financial decision you can possibly make. The most obvious sacrifice you are making when you utilize a life insurance loan is that it directly diminishes the cash value of your policy. This does not mean these loans cannot be useful. In any of the circumstances mentioned above, the benefit of having cash on hand may be worth it.

What are the benefits of a life insurance loan?

Most people apply for a life insurance coverage for one primary reason: they are trying to create a
better sense of financial security.

Having the option to utilize a life insurance loan—even if this is something you never act upon—is a unique way of establishing financial security. Up until you decide to borrow, you are accumulating wealth and benefitting from having a universal life insurance policy. You do not need to worry about what to do in the event of an emergency even during your lifetime because, no matter what, you will always have at least some sort of financial security available.

The type of life insurance policy that is right for you will depend on a wide variety of conditions. The possibility of using a life insurance loan is something that is inherently valuable. However, before dipping into the cash value of your policy, it is important to understand the consequences of making this decision.