Can You Borrow Against Your Life Insurance? Pros and Cons

Life insurance is often seen as a safety net for loved ones, but certain types, such as whole life or universal life, can also serve as financial tools. If you have a permanent life insurance policy, you may be able to borrow against the policy’s cash value. While this can offer flexibility, it’s important to understand both the benefits and potential drawbacks.

How You Might Borrow Against a Policy

To borrow against a permanent life insurance policy, the policy must have accumulated sufficient cash value; this option is typically unavailable for term life policies. To begin, you would contact your insurer to request a loan, and they may provide the funds directly from the policy’s cash value. The loan amount is usually limited to a percentage of the available cash value, and interest begins accruing immediately. Repayment can be flexible, but any unpaid balance, including interest, will reduce the death benefit if not repaid before the policyholder’s death.

Pros of Borrowing Against Life Insurance

Borrowing against your life insurance policy can offer several advantages, especially in times of financial need:

• Quick Access to Funds: Loans from life insurance policies typically don’t require credit checks or lengthy approval processes.
• Lower Interest Rates: Compared to traditional loans, policy loans may offer more favorable interest terms.
• No Fixed Repayment Schedule: You may not be required to make regular payments, as the loan might be repaid on your own timeline.

Additionally, the loan may not be considered taxable income, provided the policy remains in force and doesn’t lapse.

Cons to Consider

Despite the convenience, borrowing against your policy can carry risks:

• Reduced Death Benefit: Any outstanding loan balance (plus interest) will be deducted from the death benefit, potentially leaving beneficiaries with less.
• Interest Accrual: Even if you’re not making payments, interest continues to accumulate, which can erode the policy’s value over time.
• Policy Lapse Risk: If the loan balance grows too large relative to the cash value, the policy may lapse, potentially triggering tax consequences.

Is It Right for You?

Borrowing against a life insurance policy can be a strategic financial move, but it’s not suitable for everyone. It may be helpful for those who need liquidity and have a strong understanding of their policy’s terms. However, it’s important to weigh the long-term impact on your coverage and your beneficiaries. Before making a decision, contact J.A. Faccibene & Associates, Inc. to discuss how this option may align with your broader financial goals.

This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.