3 advantages and disadvantages of borrowing against your life insurance

Image source: Getty Images

Should you borrow against your life insurance? It’s a mixed bag.

Key points

  • It is possible to take out a loan against a whole life insurance policy.
  • While this can give you easy and affordable access to money, you might encounter some pitfalls.

There are many good reasons to buy life insurance, including protecting the people in your life who matter most to you and who may face financial hardship in the event of your death. And if you take out a whole life insurance policy, you may have the ability to borrow when you need money.

But is borrowing against your life insurance a wise decision? While there are benefits to going this route, there are also some serious downsides to consider.

Advantage #1: Easy Access

There’s a reason home equity loans are pretty easy to get. Because they’re based on equity that already exists, your credit score is less of an issue when it comes to getting approved. Similarly, when you borrow against a life insurance policy, the cash value accumulated by your policy serves as collateral for the loan. There is little risk to the business in letting you borrow against it because the money is there.

Advantage n°2: No negative credit impact

Borrowing money through a mortgage or personal loan could hurt your credit score, even if it’s minor. But borrowing against your life insurance policy shouldn’t impact your credit, so if you’re working to increase that number, it’s one less thing to worry about. In fact, with a life insurance loan, you usually don’t even need a credit check.

Benefit #3: Low interest rate

Although you generally won’t get an interest-free loan when you borrow against your life insurance, you will usually pay a fairly low rate on the amount you borrow. Again, it has to do with the risk taken. You could pay less interest on a life insurance loan than on home equity or a personal loan.

Con n°1: A reduced death benefit

Any money you don’t repay to your life insurance company is deducted from your death benefit, leaving less money for your beneficiaries to collect in the event of your death. Also, if you die before you have paid off your life insurance loan in full, any accrued interest on that loan will also be deducted from your death benefit.

Con n°2: The risk of terminating a contract

It is possible that if you borrow a large sum on your life insurance and accumulate a lot of interest that exceeds your cash balance, your policy will lapse and be terminated by its issuer. If this were to happen, not only would you lose your policy, but your loan balance would then be considered taxable income. This could leave you with significant financial responsibility on your hands.

Con #3: You may have to wait a while to borrow against your policy

It takes time for a whole life insurance policy to accumulate cash value. If you need access to cash quickly after setting up your policy, you may not be able to borrow what you need.

Obviously, the decision to borrow against your life insurance is not easy. Carefully consider the pros and cons before making that call.

Life insurance protection for you and your family

While many varieties of insurance coverage are designed to help protect a person’s family and assets, life insurance is an essential type of protection. The right life insurance can help protect the people who depend on you most if you die. Choosing the right life insurance policy is essential to ensure the right protection for your loved ones. We’ve sorted through the different options to bring you our picks for the best life insurance policies available today.

Comments are closed.