Can I Take a Loan Out on my Policy?

The answer to this question depends largely upon the type of life insurance policy you have. If you have a term life insurance policy with a set premium for a specified period, the answer is you cannot take a loan out on the policy. This is because a term plan does not accumulate cash value over time. However, a universal life insurance or whole life insurance policy can build cash value over the course of time thus giving you the option to take out a policy loan.

Choosing to Borrow from Insurance

With policies such as these, it is possible to borrow against a life insurance plan. Although, there may be limits to doing so if there is less cash in the policy's built up value than you would like to borrow. For example, you cannot expect to borrow $30,000.00 if your policy has a cash value at the time of only $20,000.00. If your premium payments are taken automatically from the policy together with any administrative fees, you may be limited to the amount you can borrow after these amounts are taken into account.

While it is possible to borrow money against certain types of life insurance, it is important to think about whether you really want to make use of the cash value of the insurance. There is always the option of borrowing money from more traditional sources like banks or credit unions. Besides this, your life insurance policy is protection you have in place in order to save your loved ones from financial difficulties after your death.

A life insurance policy's benefits can also be reserved for financing a loved one's quality or standard of living after your death once final expenses and the funeral have been paid. If you view your policy as having room for things like allowing your spouse to carry on the level of retirement living you both worked and saved for over the years, you might view cash value differently. You may see it as something akin to disposable income over and above the benefit limits.

Avoiding Excess Financial Strains

If you and your spouse were faced with a financial emergency and did not have the time to pursue traditional loans, you might feel that borrowing from an existing cash value on the life insurance policy would be a viable option. This may be a workable solution as you would not need to wait to see if you qualify for another loan. The funds would already be at your disposal.

It would also allow you to spare being saddled with an additional monthly bill as you otherwise might need to do in the event you qualified for a loan against your home's value. You also could avoid additional bills and costs by not being forced to charge high amounts to handle the emergency by making use of high interest credit cards. The funds would be available for you to make use of by contacting your insurer and going through the steps necessary to take a loan out against the policy.

If there is a substantial amount built up, you might find it makes sense to borrow but only if the loan will be able to be paid back in a reasonable amount of time. However, premium payments would still need to be paid. A life insurance plan is something you want to make full use of when it comes time to file a claim. So, it is important to carefully weigh whether or not to take a loan out on your policy if it would mean your loved ones would have to continue paying that loan before needing the full benefits.

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