Borrowing from Your Life Insurance

Many times in life circumstances arise that require considerable sums of money in order to handle. Often, for numerous people, that money is not readily on hand. However, if a person owns a whole life insurance policy, they may be able to meet their own need by borrowing against the policy. Whole, or permanent, life insurance accrues a cash value which may be used by the policyholder whenever necessary.

Once the funds are borrowed, the policyholder may or may not elect to repay the loan. If he or she elects not to pay it back, then the amount is called a withdrawal and is subtracted from the cash value available as well as the face value of the policy. In other words, if an insured person dies with a $50,000 whole life policy, but previously withdrew $5,000 for a vacation, the payable death benefit would be reduced to $45,000. If the policyholder elects to pay the borrowed amount back, it is payable with interest.

As a policy loan it is, as stated, subject to interest. In order to meet its obligations to all of its policyholders, the life insurance company invests the dollars that it receives. These investments earn interest at a rate which is close to estimates that were made in advance. When a policyholder takes a policy loan, the amount that the company has to invest is reduced by the amount of the loan. This means that the insurance company will earn less interest than was estimated, unless it makes up for it from another source. In this instance, the other source available to the company is the interest charged on the loan.

It’s usually possible to borrow up to the full amount of the available cash value of the policy. Interest rates vary for these loans, but are usually lower than from other sources. However, unexpected fees may sometimes appear during the borrowing process that will add to the baseline rate, so some policies may be more suitable for borrowing against than others.

Policy loans do not come with a repayment schedule, and are not required to be repaid. The policyholder may elect to repay some, all or none of the loan. Any amount that is not repaid, along with the accrued interest, is subtracted from the policy’s face value and the cash available account. The policyholder may also choose to cash in the entire policy and receive the full cash value that’s available.

There are no stipulations about what the funds can be used for. They can be used to pay for higher education expenses, home improvement, a new car, or a trip to Europe. It’s actually the policyholders’ own money that is being borrowed, so it can be used for whatever he or she wishes.

The policyholder should remember that the loan's outstanding principal and accrued interest are deducted from the payout in the event of an untimely and unexpected death. He or she must therefore be cautious about borrowing too heavily against the policy and possibly jeopardizing the very reason for purchasing insurance in the first place – the security and welfare of the beneficiaries.