How to Borrow From Your Life Insurance Policy: 10 Steps #how #to #collect #life #insurance
How to Borrow From Your Life Insurance Policy
Whether it be for an emergency, some needed home repairs, or that can’t-miss investment opportunity, just about everyone needs a quick infusion of cash now and then. But if you don’t have the money readily available, maybe it’s time to consider a loan. With all the financial resources that seem to be floating around out there today, you might tend to overlook one that’s probably sitting in a desk drawer or a safe deposit box—your whole life insurance policy.
Part One of Three:
Determining Whether Your Policy Qualifies As a Loan Source Edit
Check to see which kind of life insurance policy you have. Not all life insurance policies allow you to borrow against them, so you need to find out the type of policy you own. The most common types of life insurance policies are:
- Permanent life policies. These policies have a savings element along with the mortality coverage, and that is why you can borrow from them. This category can be broken down into:
- Whole Life Insurance. You pay the same amount of premium for a specific period to receive the death benefit.
- Universal Life Insurance (also known as “adjustable life insurance”). You can reduce or increase your death benefit, and also pay your premiums at any time and in any amount (subject to certain limits) after you’ve made your first premium payment.
- Variable Life Insurance. Most of your premium is invested in one or more separate investment accounts, such as stocks, bonds and mutual funds. The interest that your accounts earn increases your policy’s cash value.
- Variable Universal Life Insurance. Gives policyholders the option to invest, as well as easily change the insurance coverage amount.
- Term Life Insurance. Pays the face amount of the policy at death, and only provides protection for a set term period (normally 30 years maximum). Does not build cash value. 
Find out if your particular policy permits you to take a loan. Take a look at your policy to check if there’s a loan provision. You can also contact your agent for this information. For the most part, you can borrow against a permanent life insurance policy, since it has a cash surrender value.  As for term life policies, these are not loan sources since they don’t have a cash value that can be borrowed. 
- Only the owner of the permanent life insurance policy can borrow from it, not the insured or beneficiaries, unless they are also the owner.
Verify that your policy has enough cash value available for the loan. Check on your insurance company’s website or with your agent to find out the cash value of your policy. You can typically borrow up to the cash value you’ve accumulated in the account, but guidelines may differ from one company to the next.  Note that cash value grows slowly at first, so you may have to own the policy for a while (sometimes as long as ten years) before you can borrow against it. 
Weigh the benefits of a life insurance loan versus a conventional loan. There are several reasons a loan against your insurance policy may prove to be a better deal than a standard bank loan. Some of these are:
- There’s no approval process, credit check, or income verification, since technically you’re borrowing against your own asset.
- Insurance policy loans usually have much lower interest rates than bank loans.
- You’re not limited as to how you can use the money. A bank might restrict how you can apply the loan proceeds, but an insurance policy loan has no such limitations.
- There’s no required monthly loan payment, and there’s no payback date. The balance of the loan will be deducted from the death benefit that goes to your beneficiaries. 
Take into account the downside to borrowing against your life insurance. Few things in life are risk-free. And taking a loan against your insurance policy is no exception. For example:
- If you don’t pay the interest on your loan, the insurance company will add that unpaid interest to your loan amount. This interest is subject to compounding. What that basically means is that in addition to paying interest on the actual loan amount, you’re paying interest on all the accumulated interest as well.
- Dividends generated by the insurance policy will likely decrease as long as the loan is outstanding. Insurance dividends are basically a periodic return of your premiums. The dividend is based on the amount of your money available to be invested by the insurer. Taking the loan means that less of your money is available for investment, thus—lower dividends. 
- In many cases, the cash value in your insurance policy is protected from creditors. However, once you withdraw money, the amount you take out is no longer sheltered. 
- If the increasing amount of unpaid interest causes your loan balance to exceed your policy’s cash value, the insurance policy could lapse. 
- To keep the policy from lapsing if your loan balance becomes greater than your policy’s cash value, you’d have to pay back the entire loan. You can’t pay it back in increments. 
Consider the tax consequences. The proceeds of the insurance policy loan are usually not taxable to you, as long as the loan amount is equal to or less than the total premiums you’ve paid. However, if the policy lapses, the IRS then considers your loan balance plus interest as taxable income for which you’re liable. This only occurs when the loan proceeds exceed the cash surrender value and it only applies to the difference.  
Consider speaking with an insurance adviser or a financial planner before applying for an insurance policy loan. He or she should be able to give you guidance on the process, and perhaps suggest other alternatives for your financial needs.
Note that when you take an insurance policy loan, you’re not actually borrowing from your policy’s cash value. You’re borrowing from the insurance company, and your cash value is the collateral. 
Interest charged on a life insurance policy loan is generally not deductible for income tax purposes. 
You can stop interest on your life insurance loan from accruing, simply by paying the interest out-of-pocket. 
Ask your insurer about any processing fees that may be associated with the loan.
If need be, you can cancel (surrender) your life insurance policy, and collect the available cash surrender value. However, if you surrender the policy during the early years of ownership, the insurer will probably charge you “surrender” fees. Additionally, when you surrender your policy for cash, the gain is subject to income tax.