How to Get Life Insurance and Borrow From It

Life insurance serves as a financial safeguard for loved ones, providing a payout to beneficiaries upon the policyholder’s passing. Beyond this, certain life insurance policies offer a valuable financial resource during the policyholder’s lifetime. These policies build cash value, which can be accessed for various needs, allowing policyholders to leverage their insurance as a living asset.

Choosing and Obtaining a Policy

Not all life insurance policies are structured to provide an accessible cash value. Term life insurance, for instance, offers coverage for a specific period, such as 10, 20, or 30 years, and typically does not build cash value. In contrast, permanent life insurance policies, including whole life, universal life, variable universal life, and indexed universal life, are designed to remain in force for the policyholder’s entire life and accumulate cash value. These policies do not expire, assuming premiums are paid.

The cash value component is a fundamental feature distinguishing permanent life insurance, serving as a potential source of funds. When seeking a policy with borrowing potential, focus on these permanent options.

Obtaining a permanent life insurance policy involves several steps. The process begins with an application collecting personal information, financial details, and health history. This is followed by a medical examination to assess risk. The insurer then conducts an underwriting process to determine eligibility and premium rates. Upon approval, the insurer offers a policy, which activates coverage once accepted and the initial premium is paid.

Understanding Policy Cash Value

Cash value is a savings component within a permanent life insurance policy that grows over time. This growth occurs on a tax-deferred basis; earnings are not taxed until withdrawn or the policy is surrendered. It is distinct from the death benefit, which is the sum paid to beneficiaries upon the insured’s death.

A portion of each premium contributes to this cash value, after accounting for the cost of insurance and administrative fees. Cash value accumulation varies by policy type; some offer a guaranteed interest rate, while others tie growth to market performance. Consistent premium payments steadily increase the cash value, building a financial asset within the policy.

This cash value is accessible to the policyholder during their lifetime. It can be used for various financial needs, offering a living benefit that complements the death benefit. While available, cash value typically needs several years to accumulate substantially. If the policyholder passes away without accessing the cash value, it is generally retained by the insurer unless a rider adds it to the death benefit.

Accessing Funds Through a Policy Loan

Policyholders can access funds from their permanent life insurance policy’s cash value by taking out a loan. Requesting a loan involves contacting the insurance company and completing a form. Funds are usually disbursed within a few business days.

A policy loan generally does not require a credit check or income verification. This is because the loan is secured by the policy’s cash value, which serves as collateral. Policy loans accrue interest, with rates typically set by the insurer (often 4% to 8%). These rates are frequently more competitive than personal loans or credit cards.

Repayment terms for policy loans are flexible, often without a fixed schedule or mandatory monthly payments. Policyholders can repay the loan over time, make interest-only payments, or not repay it at all. However, any outstanding loan balance, including accrued interest, will reduce the death benefit paid to beneficiaries if the insured passes away before full repayment.

An unpaid loan risks policy lapse. If the outstanding loan balance and accumulated interest exceed the policy’s cash value, the insurance company may terminate the policy. This results in loss of insurance coverage and can trigger adverse tax consequences. Policy loans are tax-free as long as the policy remains in force. However, if the policy lapses or is surrendered with an outstanding loan, the loan amount (up to the policy’s gain) can become taxable income.