A Beginner’s Guide To Life Insurance Loans

Life Insurance Loans

If you need money during a crisis or an emergency, you always have the option of your life insurance policy. Keep in mind that you can only take out a life insurance loan on a “universal” or “whole” life policy. A term life insurance does not include the option of life insurance loans. 

That is because term life insurance does not accumulate cash value. However, borrowing from your life insurance policy should always be a last resort when all other options are exhausted. If you are thinking of taking out life insurance loans, here is everything you need to know. 

How Life Insurance Loans Work 

The loan from your life insurance does not work like a regular loan that you may take from your credit card or bank. That is because loans from insurance policies don’t have an approval process or credit checks. After all, you are technically borrowing from yourself. Even when you are planning to borrow, you are not required to explain how you will use the money. 

That is why you can use your life insurance loan for whatever you like. Keep in mind that the loan is not recognizable by the IRS as income. That is why it will be free from tax. 

Of course, that does not mean the loan will be free from interest. You are expected to pay back the life insurance loan with interest. However, the interest rate will be lower than a credit card or bank loan. 

A life insurance loan also does not include mandatory monthly payments. Because of these factors, it can be an easy loan to obtain during an emergency when you don’t have any other option. 

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When You Should Take Out A Life Insurance Loan 

An insurance loan is not suitable for all emergencies. Therefore, you need to make a sensible choice as the loan should make sense. Here are some situations where it would be reasonable to take out a life insurance loan:

  1. Non-Affordability Of Policy’s Annual Premium 

Many people struggle to pay the annual premium of the life insurance policy. If you are also struggling and don’t want a denied life insurance claim or your policy to lapse, you can take out a life insurance loan. It will help you keep the policy going. 

That is because a life insurance policy will be in effect even if you take out a loan as long as the death benefit is higher than the loan’s amount. So, of course, the option should be used when you can’t afford to make the annual premium. 

  1. You Are Not Qualified To Obtain A Standard Loan 

The money of the life insurance is already within the policy. That is why it will be readily available to you whenever you need it. If you are in an emergency and don’t qualify for a standard loan, this is a great option. 

You can easily pay any emergency bills without any credit checks or questions. It will also save you time because a standard loan has an extensive application process that takes time. Then, of course, when your standard loan comes through, you can use it to pay your insurance loan. 

  1. Other Loan Options Have High-Interest Rates 

Sometimes, traditional loans have a high-interest rate or ask for additional collateral. These requirements can be a hindrance, so many people don’t prefer to take out such loans. In such a case, you always have the option of your life insurance policy loan. 

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The life insurance loan does not have terms such as renewal date, repayment dates, and additional fees compared to standard loans. Life insurance policy loans are competitive and can help you out in cases of emergency. 

What You Should Not Do When Taking Out A Life Insurance Loan 

To make an informed decision of taking out a life insurance policy loan, here are the top three things you should not do:

  • Don’t end up paying more money
  • Don’t lower your death benefit
  • Don’t tamper with your guarantee

If you reduce your death benefit, the beneficiaries will get a lower amount, which will defeat the purpose of your life insurance policy. Besides that, permanent insurance guarantees require you to stick to your premium payments and accumulate cash. That is why you should not take our cash to reduce the amount required to ensure a guarantee. 

Final Words 

That was a complete beginner’s guide to taking out life insurance loans. Keep in mind that these loans should only be taken out when going through an emergency and need immediate cash. In such cases, a life insurance loan can be a lifesaver. 

However, if you don’t need money immediately, it is always better to look at other forms of loans. A life insurance loan should always be a last resort when it comes to getting extra cash.

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