How Soon Can I Borrow From My Life Insurance Policy?  

During a financial emergency, having a fund to dip into without much of a hassle can feel like a relief. Surprisingly, few people know that a life insurance policy can provide this convenience. When they realize this, many people may wonder, “How soon can I borrow from my life insurance policy?”

As a top-rated life insurance provider, the Union Risk Services crew breaks down the basics of life insurance policy loans, how they work, and how soon you can borrow after purchasing a policy.

Does Your Life Insurance Policy Allow Policy Loans?  

 Life insurance in the United States can offer incredible boons. That said, you can only borrow against certain policies. Generally, life insurance falls into two broad categories:

• Permanent life insurance, such as whole and universal life insurance, covers the policyholder for their entire life. These policies include a cash value component that builds over time, allowing for policy loans.
• Term life insurance offers limited coverage for a set period, such as 20 years. Often called “pure life insurance” policies, they lack a cash value component and don’t allow for policy loans.

Cash value serves as the key asset-building component of a life insurance policy, enabling policy loans — unlike the death benefit, which you cannot borrow against. When you first purchase a life insurance policy, the cash value typically starts at zero. With each subsequent premium payment, a portion grows tax-deferred over time as part of the cash value component. Policies generally don’t accrue enough cash value to borrow against until the first two to five years.

Each permanent life insurance policy has a different way of calculating cash value. Sometimes, it depends on variable market performance, such as the returns on a bond portfolio; in others, it is tied to a guaranteed interest rate.

How long it takes to generate enough value to borrow against depends on how quickly your specific policy accumulates its cash value.

Guidelines for Life Insurance Loans  

While specific rules may vary among policies and insurance companies, always contact your life insurance agent or company for detailed information. However, most policies tend to follow the following general rules:

• You can usually borrow from permanent life insurance policies, such as whole life and standard universal life, indexed universal life, and variable universal life.
• Term life insurance policies typically do not allow borrowing.
• Insurance companies typically cap the amount you can borrow at 90% of your policy’s current cash value.
• The loan amount accrues interest charges.
• You may forego repaying the loan, but outstanding loan balances reduce the death benefit payout. This may also lead to the policy lapsing, especially with certain types of policies.

When Can You Borrow Against a Life Insurance Policy?  

You can typically borrow from your life insurance policy once the cash value component reaches a certain minimum threshold.

However, to borrow the desired amount, you must have a sufficient cash value balance to serve as collateral for the loan size you require. That said, the more money you need to borrow, the longer it will take to build cash value sufficient to cover the loan.

So, how soon can I borrow from my life insurance policy? Depending on your policy’s cash value growth, regulations, and the size of your policy and requested loan, this process could take anywhere from two to 10 years or more from the date of policy purchase.

This may seem like a lengthy period, but remember that insurance companies design these policies to last a lifetime. Moreover, they provide the full death benefit payout from the first day the policy is in effect, even if you cannot take out a policy loan.

How Much Can You Borrow?  

The amount you can borrow varies, but generally, life insurance companies permit borrowing up to approximately 90% of your plan’s current cash value. For instance, if your life insurance cash value totals $8,000, you might qualify for a loan of up to $7,200.

Remember that your policy serves as collateral for the loan. In the event you pass after borrowing against your policy, the insurance company will typically deduct any outstanding loan balance from the death benefit to your beneficiaries.

The Pros and Cons of Borrowing Against Life Insurance  

When it comes to taking a loan, you always want to weigh all your different options. Consider the following pros and cons of loans from a life insurance policy.

Advantages

The advantages include:

• Low Interest Rates: Life insurance loans generally feature lower interest rates compared to a bank loan, credit card, or other types of loans.
• Easy qualification and approval process: Unlike traditional loans, life insurance loans typically don’t require a credit check, minimum income, or employment verification. Moreover, because you’re essentially borrowing against your policy’s death benefit, you don’t need to provide other assets as collateral to qualify.
• Tax-free income: The IRS doesn’t consider life insurance loans as taxable income. This means you typically won’t owe taxes on borrowed funds.
• No repayment required: Technically, you’re not obligated to repay a life insurance loan since you’re borrowing from your own cash value. However, failing to repay the loan could result in a reduced death benefit for your beneficiaries or no benefit at all.

Disadvantages  

Despite the potential benefits, borrowing from your life insurance comes with some important points to consider:

• Reduction in death benefit: Failing to repay the loan reduces your death benefit.
• Risk of policy lapse: If the outstanding loan amount, including interest, surpasses your policy’s current cash value, your coverage could lapse, leaving you without any protection.
• Tax implications: Allowing your policy to lapse may result in owing taxes on the investment gains or interest accrued by your cash value.

Secure Your Family’s Future With a Life Insurance Policy  

Whether you want to know, “How soon can I borrow from my life insurance policy?” or need help getting life insurance with a health problem, count on us.

At Union Risk Services, we specialize in providing a variety of insurance policies to our individual or business clients, from life to property insurance and more. Call Union Risk Services today at (718) 370-3131 in Millburn, NJ, to get started.