Nowadays, life insurance has become a critical component of financial planning. It gives peace of mind to you and your loved ones and provides them with financial protection if the worst occurs. While considering which life insurance policy to obtain, you need to consider various aspects to look into details. To make the right decision, we want to highlight one of the implicit benefits of some policies – you can borrow money from your life insurance. This option offers you a convenient and low-cost source of funding that you can rely on in different situations.

Types of life insurance you can borrow from

There are two main types of life insurance – permanent and term. However, if you’re looking for a financial backup plan – whole life or universal life insurance, also known as a permanent policy, is your way to go.  

There is no cash value with term life insurance, which many people find a more affordable and practical option. It is only intended to last for a short time, typically between five and thirty years.

The cost of whole life and universal life insurance plans is higher than term insurance, but they do not have a set expiration date. The policy is in effect for the insured person’s entire lifetime if necessary premiums are paid. Although the monthly premiums are more expensive than the term, a cash value account that is an element of the policy grows as more money is deposited into it than the cost of insurance. It usually takes a few years for the cash value to increase to a point where borrowing from life insurance is reasonable. The cash value is a buffer against the escalating insurance costs as you age. This keeps rates stable throughout your life and prevents them from rising to unaffordable levels in your older years.

Can you use life insurance while alive?

One of its key benefits is the ability to use permanent life insurance while still alive. A type of permanent insurance known as whole and universal life insurance offers lasting protection in addition to a cash value component. And also you can take benefit from it during your life for various purposes.

Key takeaways

  • The fact that taking out a loan against your life insurance policy won’t harm your credit rating or put your assets at risk is another great benefit. As a result, you can access your policy’s cash value without worrying about how it will affect your credit or other investments.
  • You are not required to repay the loan as long as you live. This can give you peace of mind and the flexibility to use the money as you see fit.
  • Whole life insurance policies have several tax benefits that make them a desirable investment choice. For instance, you do not pay taxes on the interest earned unless you withdraw the money. As the insurance’s cash value grows tax-deferred. Additionally, your beneficiaries obtain the death benefit tax-free, which might lead to significant tax savings.

How Soon Can You Borrow Against a Life Insurance Policy?

Once a life insurance policy has built up enough cash value to allow you to take out a loan in the amount needed, you can borrow against it. Depending on how your policy is set up, this may take several years to accumulate. 

How Much Can You Borrow Against Your Life Insurance Policy?

The maximum you can borrow against your life insurance is generally up to 90% of its cash value. However, each insurance company will have different standards in place.

Can I Borrow Against a Term Life Policy?

There is nothing to borrow because term insurance doesn’t include a cash value component.

Nevertheless, it’s crucial to maintain the condition of your policy.  To keep the coverage in effect, pay your premiums on time. If you default on your loan payments, the policy might lapse. In this case, the death benefit could be reduced or lost entirely.

Working with a competent insurance broker is essential if you want to get the most out of your life insurance coverage. At Baker Consulting, we can assist you in understanding many aspects of life insurance options available and suggest one that best suits your requirements. Additionally, we may guide you in the following:

  • comparing different policies
  • negotiating the best prices 
  • offering continuous guidance and support as your needs change over time.

Regardless of what happens, remain financially secure and prepared.

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