September is “Life Insurance Awareness Month,” and we wanted to answer this common question: “What life insurance can you borrow from?” Since life insurance policies come in so many forms, let’s start with the type you can’t borrow from. The most common form of life insurance is called “term life” which contains only a “death benefit” paid to a beneficiary upon the insured person’s death. You cannot borrow from a term life policy because it’s strictly used to provide financial protection in the form of a death benefit, or cash for a loved one in the event of an insured’s passing.
Life Insurance Policies You Can Borrow From
Permanent life insurance policies can be borrowed from, because in addition to a death benefit, there is a cash value portion of the policy which you contribute to as part of your premium cost, and the cash portion can grow through time. Permanent means permanent as opposed to term; the policies don’t end at a certain point of time, they continue for as long as you pay the premiums. The cash value in a life insurance policy can be borrowed while you are alive—you can borrow the cash to fund college costs, start a new business, pay for retirement expenses and more, sometimes with significant tax advantages as long as the policy remains in force.
Will I Owe Interest On Amounts I Borrow From a Life Policy?
If you borrow part of your cash value, you will borrow the money tax-free in most cases, but you will be charged a fixed or fluctuating interest rate on the outstanding balance of any loan depending on your policy’s terms. You will have to carefully assess or consult with your financial advisor to make sure your policy stays in good standing if you borrow from it.
Some policies continue to credit interest to the total cash-value portion of your account even if you have borrowed money from it, treating the cash value portion as though all the money were still there.
Permanent Types Of Insurance You Can Borrow From
The major types of permanent insurance policies which can build cash value are whole life, universal life and variable life.
- Whole Life
Whole life insurance policies are permanent policies with fairly simple terms. They have fixed premiums that don’t go up, and cash value accumulation guaranteed by the financial strength of the insurance company providing the policy.
- Universal Life
Universal life insurance gives consumers flexibility in the premium payments, death benefit amounts, and the savings or cash value elements of their policies. There are different types, including one of the more popular forms, called indexed universal life (IUL). With IUL policies, the cash value is benchmarked to the performance of an index or indices, such as the S&P 500 for potential growth. While an IUL policy’s cash value growth is tied to the performance of the selected index or indexes, the money is not actually invested in the market, it is a contract with the insurance company which determines how crediting works based on the index/indices’ performance. Therefore, your principal is protected from stock market risk, but it can grow based on stock market growth as outlined by your particular policy’s terms.
- Variable Life
With variable life insurance, the cash value portion of a variable policy is actually invested in the market; therefore, there is the potential for loss of principal based on stock market losses. With variable life, you will actually invest, and receive prospectuses to review so that you can determine whether or not a subaccount—which the cash value is invested in—fits with your overall risk strategy. Sometimes variable life policies come with higher fees due to the investment management of subaccounts.
If I Borrow Money, What Happens to the Policy After I Die?
If you borrow cash value from a policy, the amount borrowed is deducted from the total death benefit paid to your named beneficiaries in addition to any remaining fees or interest owed.
Each life policy from each different insurance carrier has different features, and new types of policies are being introduced to the market all the time. It is very important to work with a qualified advisor to find the policy that might be best suited for you to meet your family’s needs. Call us to learn more about life insurance!
This article is for general information purposes only and is not to be relied upon for financial advice. In every case, you should seek the advice of qualified tax, financial and legal professionals to ensure that a life policy is advisable based on your unique circumstances. Guarantees are provided by insurance companies and are reliant upon the financial strength and claims-paying ability of each individual insurance carrier issuing a life insurance contract. Life insurance requires medical underwriting; therefore, not everyone will be able to purchase a life insurance policy. Life insurance policies can be complex, and it is recommended that you work with a professional to examine policy terms.
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