Borrowing Against Renewable Term Life Insurance: Is It Possible?

Borrowing against your life insurance policy can be a quick and easy way to get cash. However, it is important to note that you can only borrow against a permanent life insurance policy, such as whole life insurance or universal life insurance, and not against a term life insurance policy. This is because term life insurance does not have a cash value component, which means there is no financial reserve to borrow from. On the other hand, permanent life insurance policies include a cash value savings component on top of the death benefit. This cash value grows over time and can be borrowed against, with the policy acting as collateral for the loan. While borrowing against your life insurance policy can be convenient, there are also some risks and disadvantages to consider, such as a reduced death benefit and the possibility of your policy lapsing if the loan is not repaid.

Borrowing against permanent life insurance

Firstly, it is important to note that only permanent life insurance policies, such as whole life or universal life insurance, can be borrowed against. These policies are more expensive than term life insurance but have no predetermined expiration date. The monthly premiums are higher than term policies, but the money paid into the policy that exceeds the cost of insurance builds a cash value account that is part of the policy. This cash value can be borrowed against, but it usually takes a few years for this value to build up sufficiently.

Borrowing from a permanent life insurance policy offers several advantages. There is no credit check or approval process, making it simple and hassle-free. The funds can be used for anything, and there is no set repayment schedule. Additionally, the loan is not recognised by the IRS as income, so it remains tax-free as long as the policy stays active.

However, there are also several disadvantages and risks associated with borrowing against permanent life insurance. If the loan is not paid off, it will reduce the death benefit. Interest will accumulate over time, and if the loan balance exceeds the policy's cash value, the policy could lapse, leaving the policyholder without life insurance and potentially facing tax penalties. Borrowing against permanent life insurance can also slow down the growth of the cash value and reduce the death benefit.

Overall, while borrowing against permanent life insurance can be a convenient way to access cash, it is important to carefully consider the potential risks and long-term impacts on the policy and its benefits.

Borrowing against whole life insurance

Whole life insurance, a type of permanent life insurance, is more expensive than term life insurance but has no predetermined expiration date. If sufficient premiums are paid, the policy will be enforced for the lifetime of the insured. While the monthly premiums are higher than term life insurance, money paid into the policy that exceeds the cost of insurance builds up a cash value that is part of the policy. This cash value can be borrowed against.

When you take out a loan against your policy, your insurer lends you the money and uses the cash in your policy as collateral. The money you borrow is not withdrawn from your policy but remains in your account, continuing to build interest over time.

How to borrow

Taking out a loan from your life insurance policy is a straightforward process. You will need to reach out to your agent or insurance company, fill out a basic form, and if your cash value is sufficient, the funds will be on their way to you in a few business days.

Pros

There are several advantages to borrowing against your whole life insurance policy:

• Easy qualification: There is no credit check or income verification required.
• Quick access to funds: The approval and funding process is fast and easy.
• Low-interest rates: Policy loans typically have much lower interest rates than bank loans or credit cards.
• Flexible repayment: There is no set repayment schedule, and you can pay the loan back as quickly or slowly as you want.

Cons

However, there are also some serious risks and disadvantages to consider:

• Reduced death benefit: If you don't repay the loan before you die, it will be deducted from the death benefit your beneficiaries receive.
• Risk of lapse: If the balance of your loan grows past the policy's cash value, the policy could lapse, and you could owe taxes on the amount you borrowed.
• Interest accumulation: Interest will continue to accrue on the loan, and if left unpaid, could eventually drain your policy's cash value.
• Reduced cash value growth: Borrowing against your policy may slow down how quickly your cash value grows.

Other considerations

In addition to the pros and cons outlined above, there are a few other things to keep in mind when considering borrowing against your whole life insurance policy:

• Minimum cash value: You will need to have sufficient cash value in your policy before you can take out a loan, which could take several years.
• Borrowing limits: You can typically borrow up to 90% of the policy's cash value, but this may vary depending on the insurance company.
• No tax implications: The loan is not recognised by the IRS as income and is therefore tax-free as long as the policy stays active.

Borrowing against universal life insurance

Firstly, borrowing against a universal life insurance policy can reduce the death benefit if the loan is not paid off. The loan amount, including any accrued interest, will be deducted from the death benefit, resulting in a lower payout for beneficiaries. Secondly, interest accrues on the loan balance, and if left unpaid, it can cause the policy to lapse. This means that the policy will no longer be in force, and the policyholder may owe taxes on the borrowed amount.

To borrow against a universal life insurance policy, the policy must have sufficient cash value. The minimum cash value required varies by insurer, and it usually takes several years for the policy to accumulate enough value. The borrowing process is straightforward and does not involve credit checks or approvals. Policyholders can simply reach out to their agent or insurance company and fill out a basic form. The funds are typically available within a few business days.

It's important to weigh the advantages and disadvantages of borrowing against a universal life insurance policy. On the one hand, it offers quick access to cash without the need for a credit check or collateral. On the other hand, there are risks involved, including a reduced death benefit and the possibility of policy lapse if the loan is not repaid. Policyholders should carefully consider their options and seek financial advice before making a decision.

Borrowing against variable life insurance

Like other permanent life insurance policies, VUL policies allow you to borrow against the cash value that has been built up over time. This means that you are essentially borrowing from yourself, with the cash value acting as collateral for the loan. There is no approval process, credit check, or invasive procedure involved, making it a simple and hassle-free option.

However, it's important to remember that borrowing from your policy comes with certain risks. If you don't repay the loan, it will be deducted from your death benefit, reducing the amount your beneficiaries will receive. Additionally, if the cash value dips too low and the loan remains unpaid, your policy could lapse, potentially resulting in a phantom income tax gain. Therefore, while borrowing against variable life insurance can be beneficial, it's crucial to carefully consider all the details and potential risks before making a decision.

Borrowing against final expense insurance

Advantages

• No credit check is required to borrow against final expense insurance.
• You can borrow a significant portion of the cash value, depending on the insurance company.
• There are generally no restrictions on how you use the borrowed funds.
• The money may be accessible quickly, sometimes within a few days.
• There is usually no set repayment schedule, and you can pay back the loan at your convenience.
• The interest rates on policy loans are typically lower than those of traditional loans.

Disadvantages

• You will have to pay interest on the loan.
• There may be penalties if you don't repay the loan before your passing.
• You are essentially borrowing from yourself and paying compound interest on it.
• If the outstanding loan amount exceeds what you've paid in premiums, you may incur tax liabilities.
• If you're unable to repay the loan before your passing, the insurance company will deduct the amount owed from the death benefit, reducing the amount available for funeral expenses.
• If the loan amount and interest exceed the cash value of the policy, the insurance company could void the policy, resulting in a loss of coverage and cash value.

Process

Alternatives

If you're considering borrowing against final expense insurance, it's worth exploring other options as well. Regular life insurance policies, such as whole life or universal life, may offer larger death benefits and provide more flexibility in how the funds are used. Additionally, term life policies are generally more affordable and can provide coverage for a specific period. However, term life policies do not build cash value, so borrowing against them is not possible.

Frequently asked questions