Borrowing from Your Life Insurance?

By Compuquotes Team on March 26th, 2008

Do you need some money for the down-payment on a home, for college tuition or to pick up an RV and tour the nation? Rather than taking out a loan for a 10% or even higher interest rate, consider borrowing money from your life insurance plan. The loans are often very low interest and paying the loan may be postponed indefinitely.

Start by determining the cash value of your insurance policy. This is usually found on annual or monthly statements. Calculate what 90% of the cash value is, you don't want to borrow more than that. If 90% of the cash value of your insurance policy is enough for whatever you need, then borrowing from you life insurance is very much a viable option.

If you don't have a copy of the insurance policy documentation regarding their cash-out or loan rules, you can call and request them. Once you know how much you can borrow and on what terms, you can begin shopping for other offers as well.

Whole life and universal life insurance plans almost always carry a clear-cut cash out or loan policy. Term life policies usually do not offer loan options but with so many insurance products on the market, it pays to understand your policy specifics.

Some insurance companies require that you enter into a viatical settlement (any unpaid balance and interest from your loan will be subtracted from the policy amount upon death.) Other insurance policies require higher premiums after a loan or cash out has been processed.

One of the great benefits of borrowing from your life insurance policy is that there are very few regulations. It is money you've already paid income taxes on, there are no dividends or earnings (new money) to borrow and it isn't restricted to any particular age like a retirement fund. What's more, there are usually no penalties if you decide not to pay back the loan.

Beyond your insuring company, you may be able to obtain a loan against your life insurance policy. Some banks and investment firms will loan you money in exchange for being named as beneficiary of your life insurance policy. Their loans typically do not mature or require any payments until your death. This is riskier than cashing out your policy from the insurer, but is an option worth considering.

Speak with your insurance representative before borrowing against it. In a few cases, a traditional loan or home equity loan will accrue less interest or be a more financially sound decision. If you believe your family will need the funds from the life insurance policy when you die and you are reaching the end of your life, consider a loan that will be forgiven upon your death.

Once you've decided which avenue suits your needs best, begin the loan process. Figure out how much money you need to borrow and the repayment scheme that makes the most sense for your life. You may or may not want to repay some or all of the loan, depending on your circumstances.

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