How to Borrow Against Whole Life Insurance

Whole life insurance offers a unique financial feature, allowing policyholders to access accumulated funds through a policy loan. This option can provide liquidity for various needs, leveraging the policy’s inherent value.

Understanding Whole Life Policy Loans

A loan from a whole life insurance policy differs from a traditional bank loan because it accesses the policy’s cash value. This cash value grows over time as a component of permanent life insurance. When a policyholder takes a loan, they are borrowing from the insurance company’s general account, with the policy’s cash value serving as collateral. The policy remains in force and continues to earn interest or dividends, although the net growth might be affected by the outstanding loan.

These loans do not have a fixed repayment schedule. Policyholders have flexibility in how and when they repay the borrowed amount. There are no credit checks required for a whole life policy loan, and taking such a loan does not impact personal credit scores.

Determining Your Loan Eligibility and Terms

A policy must have accumulated sufficient cash value to be eligible for a loan. Cash value grows from premium payments, earned interest, and potential dividends. While cash value begins accumulating early, it typically takes several years for the cash value to become substantial enough for a meaningful loan.

Policyholders should review their policy documents to find the loan provisions. These provisions detail the maximum loan amount available, which can vary by insurer and policy terms. The policy documents also state the loan interest rate, which can be fixed or variable. Contacting the insurance company directly allows for verification of the current cash value and the exact loan amount available.

Applying for a Policy Loan

Policyholders typically initiate a loan request through their insurance company’s online portal, by downloading and submitting a paper form, or by making a request over the phone or via mail. Many insurers provide specific sections on their websites for policyholders to log in and navigate to the loan request area.

Completing the loan application form requires accurate details, including the desired loan amount. The application form will require signatures and, in some cases, notarization. After completing the form, it can be submitted through various channels such as uploading via the online portal, mailing the physical form, or faxing it. The processing time for a policy loan typically ranges from 5 to 10 business days, with funds often disbursed through direct deposit or a mailed check.

Managing Your Policy Loan

Interest begins to accrue immediately on the outstanding balance. If interest payments are not made, the accrued interest is added to the outstanding loan balance, increasing the total amount owed.

A significant feature of whole life policy loans is the absence of a mandatory repayment schedule. Policyholders have the flexibility to make sporadic payments, regular payments, or choose not to repay the principal at all. Payments can typically be made online, through mail, or over the phone.

An outstanding loan balance, including any accrued interest, will reduce the death benefit paid to beneficiaries upon the insured’s death. The cash value of the policy continues to grow, but the net cash value available for withdrawals or surrenders is reduced by the outstanding loan. A policy can lapse if the outstanding loan balance plus accrued interest exceeds the policy’s cash value, particularly if interest is not paid, potentially leading to adverse tax consequences on the outstanding loan amount.