Life Insurance You Can Borrow Against

Mar 05

There is too much controversy about how good or useless it is taking out life insurance, because of the premiums that people have to pay for a lifetime. However, there are several types of life insurance coverage to choose from and depending on each one’s need for protection, the term of the policy determines the premiums to pay during the life of the policy and if you need critical illness coverage or not. However, many people do not care at all about the coverage of a life insurance policy, but in the money that can be borrowed against it.

What Life Insurance to Choose From

Most people believe that life insurance is a lifetime policy that must only be purchased in elderly years to protect one’s loved ones from facing hard financial times after the death of the policyholder. However, anyone can take out a life insurance policy at any age and choose the right coverage from different types of policies.

Therefore, whether you need term insurance, whole life insurance, universal life insurance, or variable life insurance, your insurer can offer you different quotes, besides letting you know the term of the policy and the benefits that the coverage offers to your beneficiary.

Borrowing Against Your Life Insurance Policy

Many people apply for life insurance with a different purpose in mind; borrowing money against life insurance as per the terms of the policy, but only whole life insurance and universal life insurance are policies that allows you to borrow money. However, keep in mind that such money comes from the cash value that your life insurance policy has accumulated, although you cannot borrow against your death benefit. To determine the amount of money that can be borrowed, you can review your annual statement or call the insurance customer service to get your actual cash surrender value, also called loan value..

Life Insurance, Emergency Fund or Loan?

The problem with borrowing money from your life insurance policy is that you may suddenly confuse it with a quick loan that you can look at whenever you need cash, in the knowledge that you will not have to pay interest rates for the money lent. Nonetheless, this can be a bad business in the long run because life insurance could be considered an emergency fund that you are building to protect the beneficiary of the policy, not to have a source of fresh cash to finance your expenses.

Keep in mind that every time that you borrow money against your life insurance policy, your are reducing the total amount that your beneficiary will receive when you pass away, so that it is always advisable to repay the money as soon as possible. Preventing abuse, many insurance companies may charge annual interest rates over the money they lend you if you do not pay back the borrowed money promptly.

Financial advisors recommend that you do not take out life insurance with the sole purpose of borrowing money against it, particularly if your goal is financing volatile investments. There are many other ways to get the extra cash you need or in the last instance, apply for a real loan.