What You Need to Know Before Borrowing Against Your Life Insurance
What if you had a safe, easy way to borrow money and you didn’t even know it?
Borrowing against a life insurance policy is one option. In some cases, this may be the best way to get a quick injection of cash. Borrowing against your life insurance policy also comes with some possible drawbacks, so understanding the ins and outs is important.
What do you need to know about borrowing against life insurance, and how soon can you get cash when you need it? Keep reading to discover the answers!
What You Need to Know Before Borrowing Against Your Life Insurance
Keep in mind you may only withdraw from a whole life policy. You cannot borrow against a term life policy, which is the most popular type of coverage.
Term policies don’t have any cash value. However, it is possible to borrow against both universal life and whole life policies. As long as you have such a policy, the answer to “Can you borrow against life insurance?” is a big “yes.”
Is Borrowing Against Your Life Insurance Policy Right for You?
Growing up, you probably heard your parents say that just because you can do something doesn’t mean you should do something. Therefore, before you borrow against life insurance, it’s worth considering whether it’s the right decision for you and your family.
If you already have the right policy in place, then borrowing against it is one of the safest and easiest ways of getting money. However, if you don’t repay the loan, you effectively reduce the death benefit intended for your spouse, children, or other beneficiaries. Because of this, you should strongly consider your ability to repay this loan before you initiate the process.
The Pros and Cons of Borrowing Against Your Life Insurance Policy
The bad news is that borrowing against your life insurance can be a stressful decision. The good news is that analyzing the pros and cons can help make your decision-making process much easier.
The pros of such borrowing are quite straightforward. Because you are effectively borrowing from yourself, you don’t have to pass any kind of credit check, and getting the money won’t have any effect (positive or negative) on your credit rating. The IRS also doesn’t consider this money as income, meaning that in most cases, you won’t have to pay taxes.
The cons of such borrowing are equally straightforward. While the interest rates are usually lower than what you’d get with a traditional loan, you will still end up paying back more than you borrowed.
As noted before, you are also borrowing against money intended for your beneficiaries, so if you don’t pay the loan back, you’re reducing how much cash they will get later.
Finally, depending on the exact policy you have, you may endanger the guarantee of a permanent policy or must pay an additional premium to keep that guarantee in place.
How Soon Can You Borrow from Your Life Insurance Policy?
If you’re interested using your life insurance to borrow money, then you probably have a simple question: “How soon can I borrow from my life insurance policy?” The answer to that question will depend greatly on how long you have had the policy in place.
For example, as soon as the policy has enough cash value built up, it is possible to borrow money. That means that qualifying borrowers may be able to start borrowing from their policies as early as today. However, if you only took out your policy recently, then it may be several years before it has accrued enough value. In that case, you will need to pursue alternative methods of borrowing cash.
Alternative Options to Consider Instead of Borrowing Against Your Life Insurance
Maybe your policy hasn’t yet built up enough money, or maybe you don’t want to take the chance of reducing the death benefit for your family in order to get some quick cash. Fortunately, there are alternatives that allow you to secure money without having to use your life insurance coverage.
For most people, the easiest way to borrow money is to ask their bank about loan options. You may be able to take out a personal loan, and if you already have a long and positive relationship with your bank, you’ll have an easier time getting the loan approved and getting a competitive interest rate. If you have a mortgage through your bank, then you may be able to get a loan that effectively uses your home as collateral.
If you have a 401(k), it may be possible to borrow against that, as well. You can also explore other options, including getting loans through credit unions (which typically charge lower interest rates) or borrowing money with a credit card (if you do this, though, be very wary of how interest will affect how much you pay back).
Get the Best Life Insurance Coverage Today!
Now you have the information you need about borrowing against your life insurance. But do you know where you can find the best policy to protect your family?
InsureOne specializes in the kinds of coverage that give you the peace of mind that you and your family deserve. When you’re ready to protect against the future, we’re ready for you to get a quote online. Alternatively, you can pick up the phone and give us a quick call at 800-836-2240. Finally, feel free to come into one of our nearby offices at your earliest convenience!