While borrowing money from your life insurance policy can be a relatively easy way to get money in hand when you really need it, before borrowing, there are a couple of details to know. Most relevantly, only permanent or life – long insurance allow money lending. Term life insurance, a slightly cheaper and appropriate alternative for many, has no cash value and expires at the end of the term, usually from one to ten years. As cash value accumulates against the funds in a whole or universal life insurance policy, policyholders can borrow. Loans from life insurance policy have one clear advantage: the money goes tax – free to your bank account.
Insurers usually make no assumptions on how quickly the cash value will rise or to what extent. So it’s difficult to know exactly when a loan will be eligible for your policy. Moreover, insurers have different guidelines detailing just how much cash value policy may have before you can even borrow against it – and how much cash value you can borrow against it.
You don’t actually remove money from your account’s cash value when you take out a policy loan. Instead, you borrow money from the insurer’s and simply use the cash value as collateral for a loan. This is, in fact, an important feature because it ensures that the cash value is used as collateral stays within your life insurance policy and continues to accumulate interest, even though it may be at a different rate.
Furthermore, since the cash value is used as collateral, you do not need to repay the loan over a certain period of time, like many other forms of loan required. But again, if the insurer is not paid the annual interest that can be fixed or variable, the interest payment will be simply added to the actual value of the outstanding amount of loan.