Borrowing Against Life Insurance

Whether you are looking to replace income to a loved one after your death, pay for college tuition, or help cover the expenses of an aging parent, life insurance may be worth considering. While the main purpose of life insurance is to provide a death benefit to beneficiaries, whole and universal life policies also have a cash value component that you can borrow against. This feature, known as the “infinite banking” concept, allows you to borrow money from your policy without losing any of its benefits. For more information on life insurance loans, see https://www.ascendantfinancial.ca/service/financial/borrowing-money-from-life-insurance/.

Borrowing from your life insurance is simple, and there are many advantages to doing so. For example, the loan interest rate is typically lower than the interest rate on a credit card or personal loan. In addition, you don’t have to go through a credit check or explain why you need the money.

The only restriction is that the amount borrowed must be paid back in a timely manner to prevent your death benefit from being reduced or forfeited. The remaining death benefit will be awarded to your beneficiaries, minus the loan balance and accrued interest. If you fail to pay back the borrowed amount, it will accumulate interest until it exceeds the total cash value of your policy. At this point, your policy may lapse and you could lose any death benefit you would otherwise receive from it.

While the concept of infinite banking is attractive, it’s important to understand that not all life insurance policies can be accessed for loans. Only permanent, whole life insurance policies will have the cash value component that you can borrow against. However, before you can borrow from your life insurance policy, the cash value component must have reached a certain threshold, which will vary by insurer and the size of your life insurance policy. For most people, this will take two to ten years or more after the initial purchase of your life insurance.

Many life insurance experts recommend using the loan feature sparingly, if at all, to avoid unnecessary interest charges. Instead, if you are facing financial difficulties, consider working with a credit counselor to see how you can manage your debt or talk to your life insurance agent about other options available for you to obtain additional cash.

Becoming Your Own Banker

Borrowing money from your life insurance gives you access to a flexible financing source that doesn’t require a credit check or an explanation of why you need the money. But, if you don’t plan to repay the borrowed amount in a timely fashion, it’s important to establish a repayment schedule with yourself and stick to it so your life insurance is not put at risk.

In addition, if you Borrowing against life insurance, it will impact the overall performance of the policy. Any money you withdraw, including the accumulated interest and dividends, will be subject to taxes. This is in contrast to withdrawing money from a savings account, which is typically tax-free.