For most people, life insurance is an essential tool for protecting your estate and loved ones should anything happen to you. When you take out a permanent life insurance policy — whole, universal, or variable — you gain another powerful perk: cash value. And you can create liquidity now by taking out a loan against your policy.
Term Life Insurance VS. Cash Value Life Insurance
Term life insurance pays out only if you die during your policy’s coverage, meaning the financial benefits don't kick in until this event occurs. On the flip side, once you start paying into permanent life insurance (or “cash value”), it becomes an asset that you own and the policy itself gains a cash value. Once you have cash value in place, you’re able to access these funds as you would a loan.
So, what makes this an attractive financial strategy? Here are key factors for why you may want to consider borrowing against your life insurance policy.
- It’s easier to get funds than a traditional bank loan Traditional bank loans can be slow moving, difficult to get, and filled with lots of paperwork. And if you need access to funds now, like for an urgent house repair you didn’t expect, a traditional loan’s burdensome process can delay your ability to address your pressing matters. When you borrow against your cash value life insurance, however, you go through a more streamlined process. Instead of delays and lots of paperwork, you fill out a simple form or two and then usually receive the funds within a matter of days. And you don’t even need to run a credit check.
- It can be paid back on your own schedule Another perk is that you’re free to pay back your life insurance loan on your schedule. Want to pay a big chunk one month and then nothing the next month? Need to wait a few more months before you pay again? Unlike traditional loans, you can choose when you pay, and you can even opt to not make any payments. Just remember: Whatever loan balance isn’t paid off upon death is settled with your policy values, with interest.
- Lower interest rates might be possible Traditional personal loans come with interest rates that can be as high as 35 percent, depending on the lender and your credit score. That’s a lot of money going toward interest payments. Meanwhile, interest rates associated with life insurance policies are often lower, meaning you may save more money with this strategy in the long run. Before you borrow, always be sure to check the current interest rate since policies vary.
- No effect on your credit score Unlike a bank loan, taking out a life insurance loan doesn’t affect your credit score — since you are accessing funds you’ve paid into the policy’s cash value. As a result, this strategy can be helpful for anyone who wants to avoid getting credit-reporting involved in their loan options.
Overall, when you need access to quick funds with lower qualification hurdles and more flexible payment options, borrowing against your life insurance policy can help you meet your goals. If you’d like to explore if the strategy is right for you, we’re happy to talk. Please call us to schedule your complimentary consultation.