When it comes to life insurance, there are two main types: term life and permanent life. Term life insurance provides coverage for a specific period of time, while permanent life insurance provides lifelong coverage. One of the benefits of permanent life insurance is that it can act as a source of cash value that you can borrow against.
But what exactly is cash value, and how can you borrow from your permanent life insurance policy? In this article, we will explore the ins and outs of borrowing from permanent life insurance, including the benefits and drawbacks.
What is Cash Value?
Cash value is a savings component that is included in many permanent life insurance policies. As you pay your premiums, a portion of the money goes towards your death benefit, and a portion goes into a cash value account. Over time, the cash value can grow tax-deferred, meaning you won't owe taxes on the growth until you withdraw the money.
The cash value component of a permanent life insurance policy can be a valuable asset, as it provides a source of savings that can be borrowed against if needed. However, it's important to keep in mind that borrowing from your policy can have drawbacks as well.
How to Borrow from Your Permanent Life Insurance Policy
To borrow from your permanent life insurance policy, you'll need to follow a few steps:
Check your policy's terms: Before borrowing from your policy, you'll need to review your policy documents to see how much cash value you have available and what the borrowing terms are. Some policies may have restrictions on how much you can borrow or when you can borrow.
Request a loan: If you decide to borrow from your policy, you'll need to fill out a loan request form and submit it to your insurance company. The amount you can borrow will depend on your policy's cash value and any restrictions that may apply.
Wait for approval: Your insurance company will review your loan request and determine whether or not to approve it. If approved, you'll receive the funds in a lump sum or in installments, depending on your policy's terms.
Repay the loan: When you borrow from your policy, you'll be charged interest on the loan amount. You'll need to repay the loan, including the interest, over time. If you don't repay the loan, the outstanding balance will be deducted from your death benefit when you pass away.
Benefits of Borrowing from Permanent Life Insurance
Borrowing from your permanent life insurance policy can have several benefits:
No credit check required: Because you're borrowing from your own policy, there's no need for a credit check or other types of qualification.
Low interest rates: The interest rates on loans from permanent life insurance policies are often lower than those of other types of loans, such as credit cards or personal loans.
Tax-free withdrawals: When you borrow from your policy, you won't owe taxes on the withdrawal, as long as you repay the loan on time.
Drawbacks of Borrowing from Permanent Life Insurance
While borrowing from your permanent life insurance policy can be beneficial, there are also some drawbacks:
Reduces death benefit: When you borrow from your policy, the amount you borrow is deducted from your death benefit. This means that your beneficiaries will receive less money when you pass away.
Potential surrender charges: Some policies may have surrender charges if you borrow from your policy. These charges can add up and reduce the amount you receive when you surrender your policy.
Unpaid loans can reduce cash value: If you don't repay your loan, the outstanding balance will be deducted from your policy's cash value. This can reduce the amount of money you have available to borrow in the future or even cause your policy to lapse.
Borrowing from your permanent life insurance policy can be a valuable source of cash when you need it. However, it's important to weigh the benefits and drawbacks before making a decision. Make sure to review your policy's terms and restrictions, and consider the impact borrowing may have on your death benefit and cash value. By doing so, you can make an informed decision about whether borrowing from your permanent life insurance policy is right for you.