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How to Borrow Funds from Your Life Insurance Policy

Money by Ian StevensonWe all fall on hard times. During that time period, things can get rough, and we need money quickly. Certain life insurance policies allow you to borrow from them, regardless of whether something happens to you or not. For situations like that, we should all be incredibly thankful. Here are a few things that need to happen first.

Make Sure You’re Actually Able to

The first step in borrowing against your life insurance policy is actually making sure you’re able to! Not all policies let you borrow against them. Check the details in your policy to see how much it’s valued at to determine how much you can borrow. If you have a term life policy, you may be out of luck.

If you have whole life insurance, you can borrow from it once it’s earned a cash value, which usually happens after several years. If you have a $200,000 life insurance policy and it has a $75,000 cash value, you can borrow up to $75,000. The money that you borrow reduces what others will get once you pass away, so you need to look into setting up a repayment plan. You don’t have to repay the money, of course — it’s just the right thing to do.

Talk to an Expert

This part is extremely important. Before you make a huge decision like borrowing from your life insurance policy, you need to talk to someone that knows what they’re doing. Explain the situation and why you need to borrow the money from the policy. They’ll let you know of any issues that you’ll face by borrowing from your life insurance policy. Ask every question that comes across your mind. Ask about repayment options and any fees that could possibly be associated with the loan.

If they’re unable to help you, speak with a financial consultant. The choice that you’re about to make is not only going to impact your life, but will impact the lives of loved ones after you pass on. This is a decision that will put you on a repayment plan for several years, possibly even decades.

Decide on an Amount to Borrow

Stack of moneyImage via Flickr by doctorwonder

Request an amount to borrow. Make sure it’s never more than 90 percent of the cash value, but you should aim to make it much less than that. At this point, they’ll let you know if they’ll pay it out, how it will arrive, and when it should arrive. Typically, it’ll take several days to a few weeks. Make sure to document everything. Note the agent’s name that you spoke with, and write down the time, the date, their phone number, and any policy contract numbers.

Paying Back the Loan

Here’s everyone’s favorite part of loans — the repayment plans. Life insurance loans are unique in that technically, they don’t have to be paid back. You won’t have people banging down your door if you don’t pay it back for a period of time. By the time you’re at the point where you can pay it back, you may be too old for it to even matter. If you want to give the beneficiaries of your policy a secure future, though, you should pay it back.

In today’s economy, it’s uncommon to see a loan repayment with an interest rate of more than five percent. You should also see if the loan is affecting your interest payments that you’re receiving on the cash value of the policy annually. It’s possible that the amount of interest that’s credited to the cash value is significantly less than if you had just left the loan alone. Like with all situations, if you’re unsure about anything, you need to call and speak with your insurance agent or company.

Once you have the money, you’re free to do whatever you want with it. Life insurance policy money isn’t regulated, so whether you want to use it to buy a boat or finish your degree, the choice is up to you. Regarding repayment, again, that’s up to you — it’s not regulated. Just keep in mind that you won’t leave money behind when you go.

Borrowing from your life insurance policy is a huge decision and shouldn’t be impulsively made. Speak with insurance agents, financial consultants, and, most importantly, your family. Let them know of your intentions, how much you plan to borrow, and if you plan on repaying it back. If you don’t plan on repaying it back, informing them this far in advance should allow them time to plan what they’re going to do when you’re gone.

Have you ever borrowed money from your life insurance plan? How much did you borrow, and did you decide to pay it back?
 
Featured image by Ian Stevenson

Calvin Sellers is a tech writer and graphic designer from Tampa, FL. Follow him on Twitter @CalvinTheScribe.

   
 
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