Everyone has, at some point or the other, heard about life insurance. Even though not all have taken that critical step to getting life insurance premium coverage, they are still very much aware of its benefits. On the other hand, there is a side to life insurance premiums that not many people are aware of to date. As a matter of fact, even life insurance premium holders, in some cases, are not aware of this side of reduced death benefit and what it means for them.
What is a Life Insurance Loan?
As we all know, life insurance is basically a powerful way to help you protect your loved ones in case of loss of your entire life together. Beyond the death benefit that comes with a life insurance plan, there is also the life insurance loan and death benefit part. What this means is that it is possible for you to borrow a set amount of your own money on the basis of your life insurance premium coverage. There’s a lot more that goes into this than just surface-level knowledge, and that is why we are here.
In the rest of this article, we will be looking into what it means to borrow money from your life insurance policy, how to borrow money from your life insurance policy, the benefits and risks, and all you should know about the approval process.
Can You Borrow Against Life Insurance?
Yes! It is very possible to borrow from your life insurance premium coverage. However, the extent of this loan depends on a number of factors that come to pay in your premium coverage.
One of these critical factors is the agreement between the insured and the life insurance policy loan service provider. Life insurance policies come in different forms and types, and in some cases, service providers offer customizable life insurance premiums.
The content and extent of coverage of this plan based on the agreement with your life insurance service provider largely determine whether you are borrowing money you will be able to borrow from your life insurance premium payments or monthly payments and the modalities to borrowing money from your life insurance premiums and how much you can borrow from your life insurance premiums.
How Much Can You Borrow Against Your Life Insurance Policy?
As previously stated, it all comes down to the type of life insurance premium you opted for, the extent of coverage, and the agreement made between the service provider and you.
Nonetheless, on average, the standard amount you can borrow from your life insurance rests on your cash value. That means how much you have packed up in your life insurance would determine the percentage of the cash value that you can take out as a loan.
Life Insurance Loan and Cash Value
In most cases, life insurers will allow you to take out 80% of the cash value you have stored up with them. However, it is critical to understand the modalities of the loan before you take it. In some cases, the loan will attract an interest payment.
What that basically looks like is that your policy loan is still accruing unpaid fees on top of the loan. A policy’s death benefit amount may then be canceled if interest on an insurance plan plus loan amounts exceed death benefits.
So understanding the modalities involved helps ensure that you do not lose out on two fronts, i.e., interest on loan and canceling of your life insurance coverage and death benefit.
Are There Term Insurance Policies Can You Borrow From?
There are different types of life insurance policies available. Some life insurance companies go the extra mile to create a customizable life insurance plan that suits the required needs of the insured.
One type of life insurance premium plan that you can borrow from, however, is the permanent life insurance premium coverage plan. Unlike term life insurance, which does not allow you to borrow against your premium, permanent life insurance, allows the policyholder to take out funds at a low interest rate when they are in need of financing.
A number of policyholders are using cash values to supplement their retirement income, which easily makes it one of the most interesting factors to have in permanent health insurance.
Reasons to Consider a Life Insurance Loan
There are a number of reasons why you should consider opting for a loan from your insurance premiums, and here we will be looking into a few of them to put it in a better perspective.
Taking out a loan is usually a benefit of a permanent life insurance premium coverage plan. For most policyholders, it proves to be an attractive financing option when in need of access to funds. There are a number of key benefits attached to borrowing money from your insurance premium policy, and here are a a few of them:
Low Interest Rates
Although the loan taken out from your insurance premium comes with an interest cost on the loan, depending on the terms of your life insurance provider, it still comes at a very much lower rate compared to if you would be getting it from other loan or financing options.
The loan interest rates used are determined and charged based on agreed-upon charges between you and the insurance service provider. On the bright side, it comes at a range much lower than loans from banks and credit card loans.
For example, the loan and interest rate on most life insurance premiums usually range from 3 to 6 percent per annum, although these interest rates can vary based on changing market conditions and the terms of your policy agreement. Borrowing from your life insurance premium results in significant interest savings over alternatives that tend to charge 10-30% annually.
Unlike most other financing options that require you to go through a long process to get funds for the required need at the much-needed time, your life insurance policy offers faster access to the funds. The process you undergo in requesting and receiving funds is very simple and straightforward compared to an external loan from a bank or credit company.
All you have to ensure is that your policy paperwork is in order and you can get your loan approved and disbursed within a couple of weeks. On the other hand, withdrawing your policy’s cash value or full cash value portion instead would require surrendering part of the policy’s full cash value account of your policy’s cash amount value and may involve taxes and fees.
Avoid Charges and Taxes
Interest rates on applied loans are one thing, and the taxes and charges attached to the loans is another thing entirely. All of these contribute to making your loan a lot on the higher side, especially when you pull out the policy loans in a lump sum.
However, when you opt for financing with your life insurance policy coverage, you get to avoid surrender charges for fully cashing out the policy early. One more benefit in this category is that it helps prevent taxes from being triggered on withdrawals, as loans are not considered taxable income as long as they are repaid.
Do Life Insurance Policies Have Cash Value?
Yes, although not all of them. As we have well-established, the benefits you get out of your life insurance policy coverage depend largely on your service provider and the agreement you have with them on the selected plan.
There are basically two major types of life insurance policy coverage which are the full whole life insurance policy and the universal life insurance policy that accumulates a lot of cash value over time. The amount accumulates a sufficient policy cash value that you can borrow from your whole life insurance policy premium is accessible by policy lending or withdrawal.
How Does a Life Insurance Loan Affect Your Policy?
Before we go into the effects taking out a personal loan will have on your life insurance policy, it is vital to first establish the importance of getting life insurance policy coverage with a tested and trusted life insurance policy service provider as this largely determines the extent of the effect of taking out a personal loan on your life insurance policy.
Now that we have established that, the first thing to note when taking out a life insurance policy loan is the need to consult a broker or bank for accurate information on the soon-to-be financial engagement. The ban will provide you with a life insurance policy loan illustration that will give you better insight into what will happen if you take out the loan, the process of repaying it and keeping it. The life insurance policy loan provider will pay interest at the beginning of the year (or at the end of the policy year) or by revolving savings account. What is the importance of life insurance loans?
Depending on the agreement with your bank loans, your permanent life insurance policies, and your service provider, if the amount is high, your term life insurance policy might require an interest-free loan to pay for it. This does not differ from your direct withdrawal because your cash value will remain in your savings account as your loan interest is still being earned. Since you can use your term life insurance policy to pay back a bank loan and gain interest on the loan, not owe taxes, and it is not classified as an income, the loan interest therefore devoid of taxes.
Eligibility Requirements to Take a Loan
Taking a loan out of your permanent life policies or insurance policies or insurance premium is possible and beneficial. However, there are a number of requirements that determine whether you are eligible or not to take out a loan from your permanent life insurance policy or insurance policy loans or service provider; these requirements are usually set by the state laws, insurance service company, and agreed upon by you on purchase of your permanent life insurance policy or insurance premium. In order to take out a loan from a permanent life policy or insurance policy, you, as the policyholder, must meet these basic eligibility requirements:
Policy Must Have Built Up Cash Value
As previously established, not all life insurance policy plans come with a cash value benefit. If you plan to be able to take a loan from your life insurance policy as a financing option, then it is critical to opt for one that has built up cash value over time.
A great example is the permanent life insurance premium coverage plan that comes with accumulated cash value over time. Two examples of this type of life insurance are the whole life insurance and the universal life insurance premium coverage plan. The cash value component is what sets the pace for what you can take out as a loan under your insurance policy from your service providers.
Permanent policies like whole life and universal life will accumulate cash and a substantial cash value life insurance balance over time as premiums are paid. This cash value provides the underlying funds that can be borrowed. Typically a policy needs to accumulate enough cash value and to have been in place for at least a couple of years to build up a policy with sufficient cash- value for an adequate loan amount.
Policy Must Be in Good Standing
Any outstanding payment on your insurance premium affects whether or not you will be able to take out life insurance loans on your cash value life insurance policy loan premium. Outstanding payments as a result of unpaid premiums will result in life insurance. Policy that cannot give you the benefit of taking out a loan on a cash value component.
The reason for this is based on the financial security status of the insurance company. The absence of unpaid premiums or outstanding payments will help the insurance company know that your policy is financially strong enough to recover loan amounts in case of death.
The policy cannot have any outstanding unpaid premiums or be in danger of lapsing. The insurance company needs to know the policy is financially strong enough to recover loan amounts in case of death.
Minimum Time Owned
Many insurers require policyholders to have sufficient both cash flow and cash value components owned by their permanent plan for a minimum period before accessing loans, usually between 2-5 years. This ensures sufficient time for the policy’s cash flow and value to build up to reasonable loan levels.
Meeting these basic eligibility standards helps ensure the policy loan transaction does not negatively impact the long-term objectives of the life insurance policy loan plan or the insurer’s ability to pay out the death benefit if needed. Policyholders should check with their agent or insurance carrier to verify their own credit check and specific policy terms regarding the policy loan amount and prerequisites. With the credit check and the right criteria met, the next step is to learn how to request the policy loan amount from the insurance provider.
Do You Have to Pay Back Money You Borrow From Insurance?
If you happen to borrow money from your life insurance plan, then yes, that loan has to be repaid. The only plus side is that you enjoy much lower interest rates, and you get to avoid taxes and other charges that cause your loan balance to accumulate faster than you can repay it. As it usually works, the insurer typically has to repay the loan in interest. If no one pays off the outstanding loan balance, the policy can expire or be abandoned, and he or she can lose or eliminate the surviving benefits. As a policyholder, it is critical that you understand the specific policies before taking out a loan. Upon a death with an outstanding loan balance or debt, the debt is due in interest on all proceeds of a surviving benefits plan. T
How do I Withdraw Permanent Life Insurance Policy Loans?
In most insurance company cases, the process to withdraw cash or borrow money from your life insurance policy loans premium plan is usually a procedure dependent on the type of policy coverage you opted for and agreed upon with your life insurance service provider. As is usually the case, some insurance policy loans holders can withdraw money against a permanent policy plan or through a universal insurance program. Do well to contact your life insurance policy loans service provider to get the specific requirements to withdraw cash from your insurance policy loans depending on their own specific, insurance company and requirements.
What Happens if You Can’t Pay Back a Life Insurance Loan?
Although not very common, the inability to pay back an insurance loan after you borrow money is very possible and actually happens. So what does that mean for you and how does it affect your insurance company premium coverage plan? Basically, how it plays out is that the annual interest amount that you incur on your full loan balance will continue to increase. If this is taxable income tax, the accumulated interest payments on the full loan amount would become phantom income tax due.