If you have a financial situation that requires more funds than you have on hand, you may be able to borrow money from your whole life policy. This option is may be a better alternative than using credit card advances, taking out a personal loan or withdrawing money from a retirement account. With a whole life policy, the monthly payments may be higher than the premium amount required for the death benefit portion of the policy. Your insurance company invests these excess funds. The investment portion of the policy has cash value that serves as a type of savings account. Once the value of the investment account exceeds the death benefit amount stated in the policy, the difference up to 95 percent of the cash value can be borrowed if the policy has a provision authorizing loans. Although it is possible to borrow from your whole life insurance policy, you should understand the specifics of the transaction. Each insurance company has its own guidelines governing the loan process.
As with any type of loan, you should weigh the advantages and disadvantages. You may be able to obtain this loan quicker and at a lower interest rate. While you are paying the loan back with interest, the policy’s remaining cash value is also still receiving an internal rate of return, which may offset some or all of the interest that you pay. There is no approval process or credit check because your insurance policy is used as collateral. You can receive the loan proceeds in as little as five business days. Unlike a bank loan or credit card advance, a policy loan does not affect your credit report. There is no need to explain why you need the money. It can be used for any purpose, including car repairs, tuition and vacation expenses. Once you receive the money, you can design your own repayment schedule. Because the loan is not recognized as income, it is tax-free.
Once you receive the money, you need to keep track of your repayment schedule. Even though repayment options are very flexible, borrowing the cash value is still a loan and must eventually be paid back. Opting to use future interest and cash value proceeds may not generate sufficient funds to repay the loan. Failure to cover the full amount of interest increases the total of the loan balance. The IRS could also consider the unpaid interests as taxable income even though you never receive it as tangible money. If the loan is not repaid in full before the beneficiary’s death, any outstanding balance and delinquent interest will be subtracted from the benefit amount. This will lower the amount of money that heirs will receive. The insurance policy could lapse if the outstanding loan balance exceeds the cash value. If the policy lapses, the loan proceeds will be considered income by the IRS. You must pay taxes on the amount that you received. The loan is also considered income if you cancel or surrender the insurance policy.
A life insurance policy with a cash value can act as a source of funds in the event of a financial emergency. Each policy and financial situation is unique. Before borrowing money from your whole life policy, you should speak with an investment adviser so that you fully understand your responsibilities if you choose to withdraw the funds.