If you need quick cash and you have run out of options, the one place to look for such emergency loans is your insurance policy. Although it is important to note that you can only take out loans on permanent life insurance policies which is available either as a Whole Life Insurance or Universal Life Insurance
While taking a loan from a life insurance policy can be an easy way to get cash when you need it. There are some specifics to know before you decide to take up a loan on your insurance policy.
How Insurance Loan Works
The insurance loans work slightly different from a bank loan or credit card. Insurance loans do not affect your credit score, unlike other types of loans, and they eliminate the process of approval from the credit bureau since you are borrowing from yourself. When you take a loan on your insurance policy, you need not explain how you intend to use the money. You can use for anything, ranging from bills payment to vacation expenses or an emergency.
Also, tax authorities don’t recognise the loan as an income, and as a result, it is free from tax. However, it is expected that a policy loan will be paid back, and interest is also payable on insurance loans. Though the interest rates are usually much lower than the interest payable on bank loans, and there is no required monthly payment upon the borrower.
Paying Back the Loan
Even with all the accumulated benefits of taking out a loan on a life insurance policy, the loan needs to be paid back promptly. This is because of interest accrued on the loan amount on regularly, and it doesn’t stop your mandatory monthly obligation of premium payment. Interest is attached to the loan balance and accrues regardless of when bills are being paid either monthly or not. This could result in putting your loan at risk of exceeding the policy’s cash value. In the event the insurance policy lapses, you must pay taxes on the cash value.
Insurance companies would naturally provide many opportunities to keep the loan current and prevent the insurance policy from lapsing. In the event the loan balance is not paid back at the time of death of the borrower – then the loan balance plus interest will be deducted from the amount the beneficiaries are to receive from the death benefit.
In summary, you should keep the following takeaways in mind whenever you want to opt for a loan on your life insurance policy
- Taking a loan on your life insurance policy can be an easy way to get an emergency fund when you need it.
- You can only take out a loan on either permanent or whole life insurance policy.
- Policy loans are always taken against the borrower’s death benefit, and the insured use the policy as collateral for the loan.
- Insurance companies (the lender) will add interest to the loan balance, which accrues whether payment is made monthly or not.