Borrowing Against Life Insurance – Can You?
The next time you’re looking for a loan, you may want to consider your insurance policy. Borrowing against life insurance is possible if you qualify — even when there is no cash value in the policy itself as in term life insurance.
There are two methods for borrowing against your life insurance: borrowing from your life insurance company or borrowing from a life settlement through the secondary market for life insurance.
Borrowing through Your Insurance Company
A whole (or permanent) life insurance policy operates much like an investment portfolio: you put in money and it gains in value. Of course, how much can you can get through borrowing against life insurance does vary. This type of insurance portfolio has two types of value: the amount that will be paid upon your death and the amount that you have personally invested over the fees. The amount that you’ve personally invested over requirements is known as its cash value and is your personal equity: you can take it out whenever you want in the form of a loan. You cannot, however, take out your death benefits prematurely. Because you’ve already been taxed on the amount that you have invested (when you earned it), you won’t need to pay any additional taxes as income. The loan is paid back with interest rates that are paid to yourself and that will compound for the duration of the loan. The actual term of the loan is usually set by the loan provider.
Borrowing through a Secondary Market
Of course, it is not always possible to borrow through your insurance company. If your life insurance policy has little or no cash equity, but a significant death payout, you may qualify to borrow money through a life settlement. A life settlement essentially pay you part of your death benefits before you pass on. You sign over the actual death benefits to the life settlement company. You get cash now; the life settlement company is guaranteed repayment upon your passing. What are the advantages? You never need to pay this loan back and you can borrow up to the entire amount of your life settlement. You don’t have to, though; you can do a partial loan. There will be fees and interest charged regarding the loan, but they will have competitive rates. Essentially, settling this way is effectively choosing to sell part or all of your life insurance policy.