When people think of life insurance, they typically think of it as a financial safety net for their loved ones after they’re gone. But did you know that certain types of life insurance policies also allow you to borrow against them? Here’s what you need to know about this unique option and whether it might be right for you.
Types of Life Insurance That Allow Borrowing
The first thing to know is that not all life insurance policies let you borrow against them. Generally, only permanent life insurance policies, like whole life or universal life, offer this option. Unlike term life insurance, which only provides coverage for a set period, permanent policies build cash value over time. This cash value is what you can borrow from if you need funds.
How Does Borrowing Work?
Borrowing against your life insurance is similar to taking out a loan, but instead of going to a bank, you’re essentially borrowing from your policy’s accumulated cash value. The process is straightforward: you contact your insurance company, request a loan against your policy, and they issue the funds, usually without the lengthy approval process you’d encounter with a bank loan.
You must note that you’ll need to pay interest on the amount you borrow. While this interest is typically lower than a standard bank loan, it’s still a cost to consider. If you don’t pay back the loan, it might lower the amount your beneficiaries get when you pass away.
Pros and Cons of Borrowing
Pros
- Funds without a credit check
- Lower interest rates compared to most personal loans or credit cards
- Flexible repayment terms, as there’s no fixed schedule
Cons
- Unpaid loans and interest will reduce your policy’s death benefit
- Your policy could lapse if the loan balance plus interest grows too large
- Not available with term life insurance
Is Borrowing Against Life Insurance Right for You?
Borrowing against your life insurance can be a good option if you need funds quickly and have a plan to repay the loan. However, it’s essential to weigh the long-term impact on your policy and its benefits to your loved ones. For some, this flexibility provides peace of mind, while for others, it’s best left as a last resort.