Life Insurance Loan Frequently Asked Questions – Bank On Yourself

Life insurance has come a long way since its inception thousands of years ago. Initially used as a means to provide funds for burial expenses, it has evolved into a powerful tool for building wealth. Today, one of the key features that make modern life insurance products so versatile and valuable is the cash value that can be accumulated within a permanent life insurance policy.

The cash value represents the portion of the money in your policy that you can access while you’re still alive. It’s important to note that you don’t have to wait for someone to pass away in order to reap the benefits of your life insurance policy!

Reading: How soon can you borrow from a life insurance policy

Now, let’s address some commonly asked questions related to life insurance policy loans:

Can You Borrow Against a Term Life Insurance Policy?

In most cases, you cannot borrow against a term life insurance policy. Why? Because typical term policies don’t build any cash value. Without cash value, there’s no collateral for a loan. However, if you have a whole life policy, which is the safest type of life insurance to borrow against, it’s a different story. We’ll discuss the reasons behind this shortly.

Can You Get Loans from Life Insurance Policies Other Than Whole Life?

Yes! You can borrow against any permanent life insurance policy. This includes whole life, universal life, indexed universal life, variable life, and variable universal life. All of these policies build cash value. However, it’s crucial to understand that there are certain risks involved when taking out loans against some of these policies. We’ll dive deeper into this topic later in the article.

How Much Can You Borrow from a Permanent Life Insurance Policy?

Technically, you’re not borrowing from your policy itself. Instead, you’re borrowing from the life insurance company’s general fund, using the cash value and death benefit of your policy as collateral. Typically, you can borrow around 85% to 90% of the cash value, depending on the specific terms set by the insurance company.

For more detailed information, check out our practical consumer guide to life insurance: “How do life insurance loans work? Which one is right for you?”

How Soon Can You Borrow from Your Life Insurance Policy?

You can borrow from your policy as soon as you’ve accumulated some cash value. With traditional whole life policies, it may take several years to build up a significant amount of cash value. However, with high-cash-value, dividend-early whole life insurance policies like the “house bank” policies we offer, you can typically access cash value within the first month. Keep in mind that borrowing against your policy early may not always be the best decision. It’s important to consider your specific circumstances before making such a choice.

How Do Life Insurance Loans Work?

Here’s a quick overview of how life insurance policy loans work:

1. You inform the company about the amount you want to borrow and provide instructions on where to send the funds. There’s no need to fill out credit applications or explain the purpose of the loan.

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   Within a few days, the company will send you a check or arrange a wire transfer to your designated account.

3. The company will charge you interest, which is usually at a competitive rate. Since your policy serves as collateral, they have a level of security. The interest charged will be added to your loan balance.

4. If your policy offers this feature, you’ll continue to earn the same growth as if you hadn’t taken out a policy loan. By repaying the loan at the interest rate provided by the company, you won’t see any negative impacts on your policy’s cash value. In fact, your cash value can remain the same as if you hadn’t borrowed anything.

Remember, not all life insurance policies offer this option. That’s why it’s essential to work with professionals experienced in this field, like the team at Bank On Yourself.

Do I Have to Pay Back My Life Insurance Loan?

In general, it is advisable to repay your life insurance loan. While you’re not bound by a strict repayment schedule, there are three significant benefits to consider:

1. Paying back your loan frees up funds for other needs. For example, if you have outstanding loans for college expenses, repaying them can create additional funds for your retirement.

2. If you pass away with an unpaid loan balance, the death benefit paid to your beneficiaries will be reduced by the amount owed.

3. If the loan balance exceeds the cash value, your policy could lapse, leading to potential tax consequences.

However, many individuals who borrow to cover retirement expenses don’t plan to repay the loans after they retire. It’s essential to discuss your specific situation with a financial representative who can guide you towards the best decision, even before you purchase a policy.

Considerations with Life Insurance Policy Loans

One crucial aspect to consider when taking out a life insurance policy loan is the potential growth of your loan balance over time. If left unattended, the interest added to the outstanding loan can lead to a significant balance. To avoid this scenario, it’s wise to have a Bank On Yourself professional regularly monitor your loans and recommend actions to keep your loan balance well below your full cash value. In some cases, paying at least the interest on your policy loan may be necessary.

Different Policies, Different Risks

While it’s true that you can borrow from any cash-value-building policy, it’s important to be aware that some policies come with more risks than others. Let’s explore a few types of policies and the potential concerns associated with borrowing against them:

Concerns about Loans for Universal and Indexed Universal Life Policies

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Universal life (UL) and indexed universal life (IUL) policies deduct insurance costs and administrative fees from the policy’s cash value each month. These costs may include charges for insurance, policy transactions, policy issuance, premiums, and additional riders.

The terms of UL and IUL policies state that when these costs increase, the insurance company can pass the increases on to you, the policyholder, up to a certain maximum limit. This can cause your cash value to decrease, posing a risk to the overall stability of your policy.

Increased costs can also result in higher premiums, which, in turn, can reduce the available cash for loan repayment. This could potentially lead to an increase in your loan balance.

Additionally, IUL policies often promise unrealistic rates of return, such as 8% or more annually. However, these rates are rarely achieved in practice. If your policy’s actual returns fall short of expectations, you may find yourself with a loan balance that exceeds your cash value. Consequently, your policy could lapse unless you have the means to repay the loan and avoid substantial tax implications.

Concerns about Universal Variable and Variable Life Insurance Policy Loans

Variable life insurance policies share similar concerns with universal policies. The death benefit or cash value can be reduced, premiums can increase, and there are no guarantees regarding the future performance of the policy. This uncertainty makes borrowing against these policies inherently risky. If your policy underperforms, you may face higher premiums, reduced death benefits, diminished cash value, and the possibility of a significant tax bill if your policy expires.

Why Whole Life Insurance Policy Loans Are Safer

Whole life insurance policies stand out as the safer option. These policies have precalculated all costs that UL and IUL policyholders often bear. Everything is guaranteed, including annual cash value growth, death benefits, and premium amounts. Dividend-paying whole life insurance policies provide guaranteed stability in all aspects, except for dividends. Here’s an important point to remember: Dividends can only make your situation better, never worse!

Embrace the Power of a Self-Banking Dividend-Paying Whole Life Insurance Policy

Of course, the primary purpose of a life insurance policy is to protect your loved ones and organizations in case of unfortunate events. However, it’s equally important not to overlook the living benefits of a “trust yourself” whole life insurance policy. These policies offer the unique advantage of safely borrowing against your policy to finance major expenses while still maintaining the growth of your policy as if nothing changed.

Furthermore, dividend-paying whole life insurance policies come with additional benefits, such as tax advantages, security, and guaranteed growth.

To learn more about the Bank-On-Your-Own strategy and its incredible benefits, we invite you to download our free special report, “5 Simple Steps to Bypass Wall Street, Beat the Banks at Their Own Game, and Take Control of Your Future Finances.”

To determine the suitability of a high-dividend cash value advance whole life insurance policy for your specific situation, request a free analysis and recommendation from one of our qualified Bank On Yourself professionals. There’s no obligation, and it will provide you with valuable insights into the potential gains and losses associated with this powerful wealth-building tool.

Take control of your financial future with Bank On Yourself and witness the remarkable difference it can make in your life.

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