Borrowing Against Whole Life Insurance: A Step-by-Step Guide
You might want to borrow for a big purchase, an investment, or just need some extra cash. This can be a big financial choice, so it’s important to know the steps.
In this guide, we’ll show you how to borrow money from your Whole Life Insurance policy.
Understanding Whole Life Insurance
Whole Life Insurance covers you for your entire life as long as you pay the premiums. It builds up a cash value over time, which you can borrow against. Unlike term life insurance, which doesn’t have this cash value, Whole Life Insurance can act like a savings account.
Even though you can withdraw cash from your account, borrowing from your Whole Life Insurance policy might be a better way to access your funds. Essentially, it lets you use the cash value to get a loan. This can be a quick way to get money without the hassle of traditional loans.
Determining Eligibility
Not all Whole Life Insurance policies are immediately eligible for loans. With some newer policies, you might have to wait a bit before being able to borrow, and the cash value needs to be high enough to cover the loan.
Criteria for Borrowing Against Whole Life Insurance
To determine your eligibility, you must know:
- How much cash value is in your policy
- The terms and conditions set by the insurance provider
- Any outstanding loans or withdrawals
How Soon Can I Borrow?
How soon you can borrow from your policy depends on the insurance company. With some companies you can borrow immediately, but with others, you have to wait 12 months.
People typically start borrowing after their policies have been active for a few years (around the third year).
Steps to Borrow Against Whole Life Insurance
Here’s how you can borrow from your Whole Life Insurance policy:
Contact Your Advisor or Insurance Provider
Start by reaching out to your advisor or talking to your insurance company. Find out their rules for borrowing, interest rates, and any fees.
Review Policy Terms and Conditions
Look over your policy to understand how a loan will affect the death benefit and cash value growth.
Submit Loan Application
If you borrow directly from the insurance company, you only have to fill out one form. But if you’re borrowing from a bank (and using the policy as collateral), then you have to go through a full application and approval process.
Understand Loan Repayment Options
Repayment options are flexible: you can pay just the interest, you can pay interest plus principle, or you can even defer the payment entirely. Your death benefit can pay off any outstanding loans.
Benefits of Borrowing Against Whole Life Insurance
Here are some good reasons to borrow against your policy:
Immediate Access to Funds
Once approved, you can get your money quickly and use it for whatever you want. Seriously. Nobody’s going to stop you from using it to pay a down payment on your second home, going on your dream vacation, or renovating your house. AND you don’t have the hassle of going through a credit check, application process, income verification, etc.
Your Dollar Works Twice as Hard
Withdrawing from the cash value of your policy can slow down its growth since the growth rate is percentage-based, just like other investments. But when you borrow against the cash value, you’re not actually taking any money out of the policy — it stays in there and continues to grow as if it hasn’t been touched. This means you get to use the borrowed amount for spending or reinvesting, while your cash value keeps growing, unaffected by the loan. So you’re getting $1 to work twice as hard for you.
Potential Tax Advantages
Bank loans are not taxable, so you won’t pay extra taxes on those. However, policy loans can be taxable if the loan proceeds are above the adjusted cost basis (your original accumulated deposits).
Never Have to Pay Back Loans
One of the best parts is that you can borrow against your policy without having to worry about paying it back during your lifetime. You don’t even have to pay the interest if you don’t want to. The insurance company uses the policy as collateral, and when you pass away, the death benefit covers any outstanding loans first.
Considerations Before Borrowing
Think about these points before you borrow:
Impact on Policy Value and Benefits
Borrowing against your Whole Life Insurance policy won’t reduce your cash value, but it will reduce the death benefit (if the loan isn’t paid off until death). You still continue to enjoy all the benefits of Whole Life Insurance.
Risks Associated with Borrowing Against Insurance
You don’t need to pay off policy loans, since it can be deducted from your death benefit. But if your goal is to pass on a significant death benefit to your loved ones, it’s important to make sure that the loan balance doesn’t grow too large.
Talk to the Right Agent to Achieve Your Goals
Borrowing from your Whole Life Insurance needs careful thought and planning. Follow the steps in this guide and talk to a financial advisor to make sure it fits your goals. Always read and understand your policy’s terms before making decisions, as rules can vary. This will help you avoid any problems and stay on track.
For personalized advice and to learn the best strategies for borrowing from your Whole Life Insurance, come talk to us. We’re here to help you make the most of your policy and achieve your financial goals.