Life insurance is a product purchased with the goal of helping your loved ones should you pass away. It is one of the most important decisions you can make. It safeguards your survivors. However, it can help you during your lifetime, too.
For many people, it offers an opportunity to borrow money against the value of the policy. Not all life insurance offers this benefit. However, those that do can provide you with a lifeline that’s essential.
When Can You Borrow from Your Policy?
Not all types of life insurance offer this benefit. If you have a permanent or whole life insurance policy, you may have this option. If you have term life insurance, you may not have this benefit. That is because term life insurance does not build cash value. Whole life usually does. The longer you own and maintain a whole life insurance policy, the more value it has. Initially, you may not be able to borrow against your life insurance. However, it will grow value over time.
Are You Taking Away from the Value?
When you borrow money, you are not taking it out of the death benefit. That’s important to understand.
Generally, you borrow against the accumulated cash value. The life insurance company provides you with a loan. Often, the life insurance policy’s death benefit serves as collateral for that loan. If you default against the loan, the lender can use the death benefit to cover its losses. If you repay your loan, you do not have to worry about any lessening of your death benefit to your loved ones.
What Are the Benefits of Borrowing from Your Life Insurance?
There are benefits to this option if you decide to borrow from the policy. Terms may differ with your insurer, though. Be sure you learn more about your policy before making decisions. And, there could be a few concerns. Here’s what you need to know.
- A loan from your life insurance policy usually does not impact your credit score.
- The IRS does not recognize this loan as a form of income. That means it remains tax-free to you.
- You will need to pay it back. You will pay interest on the loan. That interest may be less expensive than other loans available to you.
Borrowing from your life insurance can be a good thing. If used properly, it can help you with most of your needs and provide an opportunity to shore up some risks.
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