When you experience a financial emergency, it’d be nice if you had a fund you could just dip into to handle it without the hassle of tons of research and filling out applications. The stress of a financial crisis is enough to be getting on with, without having to worry about the drawn out loan process. It would surprise a lot of people to know that this is actually possible with a life insurance policy.
Most people aren’t aware of the living benefits that come with a life insurance policy. Life insurance is not only supposed to be used by family members after the policyholder has passed. Life insurance policies also have the potential to assist you financially while you are alive through policy loans. Policy loans allow holders to borrow money from the cash value built up in their life insurance.
To learn how soon you can borrow from your life insurance policy, we are going to break down all basics that you need to know about life insurance policy loans and how they work.
Which Life Insurance Policies Can You Borrow Money From?
You can not get a life insurance loan from any life insurance policy out there. For example, a term life insurance policy does not have a cash value since it expires at the end of the term, which can be anywhere from one to 30 years. Because there is no cash value built up, you cannot borrow money from term life insurance policies.
In order to get life insurance policy loans, there must be a cash value component which can be found in whole life insurance and permanent life insurance policies. A whole life or permanent life insurance policy has no expiration date.
Even though the premiums are higher, all the money spent to pay premiums over the death benefit is invested by the life insurance company. As more money is added to the savings account through premium payments, you build up enough cash value that it will be available for borrowing money as you need.
Permanent life insurance policies provide policyholders with both the death benefit and the invested cash value built up through premiums.
How a Life Insurance Policy Loan Works
Once there is enough cash value in your permanent life policy, you will be able to borrow money from it with ease through a life insurance loan. The total cash value must go beyond the death benefit for a life insurance policy loan to be possible, meaning you cannot borrow against your policy immediately.
After you’ve built up enough cash value, life insurance policy loans are incredibly straightforward. When you have a medical bill to cover, or some other big emergency that comes up in your life, you can easily rely on the cash value through a policy loan without needing to jump through the hoops required with a bank loan.
A policy loan won’t affect your credit. You don’t need to go through an entire application process or undergo a credit check. You don’t need to tell the life insurance company what you need the money for, as you are essentially only borrowing from yourself.
How Soon Can You Borrow From a Cash Value Life Insurance Policy?
The answer to how soon you can borrow from your life insurance depends greatly on your policy, the size of your premiums, and your death benefit. How quickly you accumulate cash value over the death benefit depends on so many factors it can be hard to say precisely when you will be able to take out a policy loan.
There needs to be enough of the policy’s cash value accrued in the savings account to equal the amount you wish to take out as a loan.
Advantages of Life Insurance Loans
A long and arduous application process can make everything ten times more stressful when you are in a financial pinch. You don’t need to worry about an approval process or a credit check with a policy loan. You can simply borrow some cash with no questions asked. A policy loan will not show up on your credit report either. Since the cash value belongs to you, it is like you are borrowing from yourself.
There are no set terms for a cash value loan, meaning you can set your own repayment schedule. While there is a policy loan interest rate, it is likely to be lower than both personal loans and credit cards which could save you a significant amount of money.
And the cherry on top of the many benefits of life policy loans is that they are not recognized as income by the IRS, so the loan balance is free from income taxes.
Drawbacks of Life Insurance Loans
Loans using the cash value in life insurance are one of the most convenient and financially-savvy ways to borrow money. However, if you cannot afford to pay back the loan in an orderly manner, the decrease in cash value could be a significant risk. Not paying off the loan in your lifetime means that your family will not receive the full death benefit there were intended to receive.
While interest rates are lower than bank loans, many people might not like the idea of interest payments on their own invested cash. In addition to this, a considerable drawback for policyholders is the amount of time they may have to wait until they have a value sufficient enough to access cash. It may take several years until there is enough cash value for a loan amount you might need.
And finally, if you are not careful, the loan amount and accrued interest could exceed your policy’s cash value. If this were to happen, your policy could lapse, and you could lose your coverage. It is necessary to pay off your loan in a timely manner despite there being no repayment schedule, so you do not risk losing your coverage.
What To Avoid With Life Insurance Policy Loans?
While there is no timetable you must follow with a life policy loan, it is important that you still pay it back as soon as you are able. Not only will the interest increase the loan balance the longer you wait, but you are risking the size of the death benefit as time passes.
When taking out a policy loan, you must do everything you can to avoid reducing the policy’s death benefit. Don’t allow an outstanding loan to diminish the survivor benefit, which is the true purpose of life insurance. Since life is unpredictable, it’s never a good idea to leave an outstanding loan balance unpaid for too long as you are risking that the cash pay-out for survivors will be significantly less than it would have been otherwise.
Additionally, if you take too much cash out, the value may not meet the requirements that ensure your guarantee. With permanent life insurance, the cash value to maintain your guarantee may be quite high, so you will always want to double-check that you are not borrowing too much. Some life insurance companies may even charge a higher premium if your cash value does not remain at the required levels.
Alternatives For Quick Financing
If your life insurance policy does not have cash value to borrow from, there are other alternative methods out there for you to get the funding you need. A personal loan might be the best option as the funds can be used for a multitude of purposes. Personal loans come in all different shapes and sizes, and you can qualify for them with all manner of credit scores.
Unfortunately, you will likely face a higher interest rate with a personal loan than you might have with a policy loan. However, without cash value life insurance, an online personal loan could be the best way to quickly get the funding you need. Bank loans typically require a longer application process. They also tend to have stricter qualification standards which can be difficult for everyone to meet.
You may be concerned about the credit check, which is understandable as one of the greatest benefits of policy loans is there being no approval process necessary. The good news is there are funding options available for individuals with poor credit through lending products like online payday loans and online fast cash loans. With loans like these, you will need to be prepared to pay higher interest rates to make up for the credit risk.
When experiencing a financial emergency, getting creative with your possible solutions can make a world of difference in how you make it through these hard times. All financial decisions we make in the present moment have long-lasting effects, and you have the power to give yourself the financial freedom and stability you deserve.
References:
When, how, and why to consider borrowing from your life insurance policy
Tips for Borrowing Against Life Insurance with a Policy Loan