A lot of people have found success and quick solutions while borrowing from their life insurance policies. This sometimes can be a quick and easy way to get cash in hand and solve other monetary issues. But besides just getting a quick solution, there are some important few specific things you need to know before borrowing.
One thing I need you to know is that you can only borrow against a permanent life insurance policy. This means that you can borrow from either whole life insurance or a universal life insurance policy.
With all that said above, this doesn't mean that you can borrow against every other life insurance. When you look at Term Life Insurance, you'll get to realize that the insurance policy is cheaper and more suitable option for almost everyone, but the truth is that the insurance does not have any cash value. It is designed for a limited period. This is why you see it always within the range of 1-30 years.
However, if you wish to convert your term insurance policy into a permanent life insurance policy, you can do that. By so doing, you'll be able to make it available for cash value which you can build on.
Before I go very deep into how you can borrow money from your life insurance policy, let me talk about some key major things you need to consider when it comes to getting cash value for your life insurance coverage.
One of the key things you need to know is that, when you borrow from your life insurance policy, you can easily solve your urgent monetary issues, but there are always more involved.
With a life insurance policy, most especially that of permanent insurance, you can borrow from it.
Another thing you need to understand is that insurance policy loans can reduce the death benefit if not paid off.
Life Insurance companies always add their own interest to the loan you collected, which when unpaid can result in policy lapse.
The loan you can get from your insurance policy is only possible through permanent life insurance because it is the only one that has a cash value which is far different from a term policy that doesn't provide you with such kind of opportunity.
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What Are The Insurance Policies You Can Borrow From?
If you've been following this article from the very beginning, you'll notice that i made mention of Whole Life and Universal insurance policies. This two policies can be very expensive than term insurance policy, but when you look at the two of them, you'll realise that the both of them do not have a pre-determined expiration date. However, if you have enough or sufficient premiums paid, you can basically make it a lifetime insurance.
If the monthly premiums are higher than term, any money that is being paid into the policy that exceeds the cost of insurance, will build up in cash value account that is part of the insurance policy. All of this is set in place to ensure that it offsets the rising cost of insurance as you age.
When you look at it you'll notice that this is purposely done in other to make sure that premiums remain level through out life and not rise into an unaffordable amount later in the future.
When you look at the Permanent Life Insurance, the insurance has a few important values. The face value, the death benefit, and the cash value. A lot of people get it all wrong about cash value. Most people believe that cash value increase the death benefit.
This can be true in some certain types of permanent insurance policies. But in most of these policies, it does not increase the death benefit.
With money in the cash value, it grows at a rate that is determined by the type of the insurance policy. Let say for example, a regular Universal Life Insurance policy, it is known to grow base on current interest rates, while that of Variable insurance policy, any cash that is invested by the owner in the stock market grows accordingly. What this means is that it will take atleast a few years for that cashvalue to build or grow to be sufficient enough for you to take out loans.
How Does Life Insurance Loan Works?
If you've been using the bank as a means of getting loan, you discover that it affects your credit card when you fail to pay up. But the case of a policy loan is entirely different. The policy loan does not affect your credit card, and there are no regid approval process or credit check since you're essentially borrowing from yourself. This is why your insurance policy provider will not ask for too many information or answers from you. You don't need to explain yourself, and your plans on how you intend to use the loan. This means that you've freedom to use your loan money to do whatever you wish such as paying a bill, going on a vacation with family and friend, taking care of emergencies or even executing a project.
The IRS does not have a say on your loan because it is not recognized by IRS as an income. Therefore it remains free from tax so long as the policy stays active, provided it is not a modified endowment contract.
One thing that is certain about the policy loan is the fact that you must payback with interest. Although the interest rate are typically lower than that of a bank loan or credit card loan and there is no mandatory monthly repayment.
Paying Back Insurance Policy Loan
Despite the low interest rate and the flexibility in the repayment of this loan it is very important that you take the repayment of this loan very serious and ensure you repay back on time on top of your regular premium payments.
If for any reason you're unable to repay back the loan, all of the interest will be added to the balance and accrued, putting your loan at risk of exceeding your policy cash value which at the end will cause your policy to lapse. If that eventually happens, there is every possibility of you owing a tax on the amount you borrowed.
One thing that makes this loan interesting is the fact that most of the insurance companies offering such kind of loan always provide different opportunities that will help your loan by making sure that it is current and not lapsing. Once you fail to pay back the loan and you eventually die, the loan amount plus the interest owed by you will be subtracted from the amount your beneficiaries are set to receive from the death benefit.
What Is The Amount One Can Borrow Against Life Insurance Policy?
The amount you can borrow is not certain due to the fact that each and every insurance company out there have different rules they have put in place. But on a general note, the amount most insurance companies can allow you to borrow from your life insurance is 90% of its cash value.
How Soon Can You Borrow Against a Life Insurance Policy?
The only insurance policy that allows you to get cah value is the permanent life insurance policy.
These would typically include whole life and universal life (UL) policies. You cannot borrow against a term policy since there is no cash value associated with it.
Does Term Insurance Allows Borrowing ?
No. This type of insurance does not allow borrowing aginst insurance policy due to the fact that it does not have cash value component. This means that there is nothing to borrow.
Conclusion
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