Guide to Borrowing Money from a Life Insurance Policy

Life throws curveballs. Sometimes, you need a financial cushion to weather the storm. Did you know your life insurance policy might be able to help?

Many life insurance policies, especially whole life and universal life, build up cash value over time. Think of it as a built-in savings account within your policy. This cash value can be a valuable resource when you need it most.

How Does it Work?

You can borrow money against the cash value of your policy. Essentially, you're borrowing from yourself. The policy itself acts as collateral.

Important Considerations:

• Interest Rates: You'll typically pay interest on the loan, but it's usually lower than traditional loan rates.
• Impact on Death Benefit: If you pass away with an outstanding loan, the death benefit paid to your beneficiaries will be reduced by the loan amount.
• Tax Implications: Interest on policy loans is generally not taxable income.
• Policy Type:
  • Term Life: Usually doesn't build cash value, so borrowing isn't an option.
  • Whole Life: Builds cash value steadily and predictably.
  • Universal Life: More flexible, with varying rates of cash value growth.

Tips for Borrowing:

• Understand the Costs: Carefully review the interest rate and any associated fees.
• Explore Alternatives: Consider other borrowing options before tapping your policy.
• Consult with a Professional: Discuss your situation with a financial advisor to determine if borrowing from your policy is the right choice for you.

The Bottom Line:

Borrowing from your life insurance policy can be a valuable financial tool in a pinch. However, it's crucial to understand the implications and make an informed decision.