One of the ways life insurance comes to your rescue in times of need is when you are in need of quick loans. But let this not be taken for granted literally. You need to know the inside news.
Depends on the Policy Type
Life insurance policies come apart in two major shades: term life insurance and whole life insurance. Term life insurance does exactly what you buy life insurance for. Its sole purpose is to make good for the financial loss that your dependents would have in the event of your death. It does so through distribution to your family of the death benefit that you sign it up for.
None of the various types of term life insurance policy will lend money to you.
On the other hand, whole life insurance has dual default functions. Besides providing the death benefit like a term policy, it provides interest to you through generation of cash value which is a pretty controversial aspect of this type of insurance. Only such a policy can lend you from the accumulated money that grows in cash value.
So, you can get loan on life insurance only if you own a whole life insurance policy. Unless there is enough money in the cash value part, you cannot expect loan from your insurance.
How to Borrow
Taking out life insurance loan is easier than borrowing money from traditional sources. You need not have creditworthiness or qualify to get a loan. The reason is, technically speaking, when you take out loan from your cash value insurance, you actually take out your own money. And, you already know this.
So all you need to do is fill out the loan form. Before you apply be sure to check out your cash value accumulation status.
How Much You Can Borrow
Like any borrowing does, life insurance loans also have their limiting guidelines. As to how much loan from the cash value you can take is also determined by your company guidelines. That means, each company has their own guidelines for cash value loan sanctions.
Some insurers allow up to 100% of the cash value to be lent. But some are slightly conservative and may allow up to 80% to 90%. So, checking out how much you can borrow is necessary.
Pros and Cons of Loan on Life Insurance
You need to be aware of a very important drawback of this type of borrowing. The money you take out as loan grows interest on it. Unless you repay the loan, it will be sliced off along with the accumulated interests from the death benefit. That means your life insurance beneficiaries will be deprived of the legacy you signed the policy for.
However, taking out loan on life insurance is positive in a way.
When you are in an urgent need of money, it proves really to be useful. Taking loan from any financial institution needs you to go through a long process. There is also uncertainty as regards whether you will get the loan or not. But when you apply for loan from life insurance, you have two advantages: the process is quite quick and you are sure you are going to get it.
Cautions Needed about Life Insurance Loan
Taking out loans from life insurance can prove undermining in several ways:
If you abstain from repaying your loan, it will incur compound interests.
When premiums are coming from the cash value and it ceases for the loan, you need to pay the premiums. Or, the policy will eventually fall into lapse.
As your cash value is taken out, there will be less money growth because there will be less money for investment into money market.
Unless you pay off all your debt, the loan balance needs to be kept less than the cash value. Or, the policy may go into lapse which you cannot pay back in increments.
Finally, we Life Insurance Mentors team would ask you to think twice before you apply for it. Unless you are in urgent need of some cash and are ready to pay it back at the soonest possible time, you had better not tread the path of life insurance loan.