Understanding Life Insurance Loans as an Option for Finances

In the case of a financial emergency, individuals tend to turn to taking out a loan or applying for a credit card to take care of the emergency. Those solutions are reasonable, but it could cause you to create more debt that may be difficult to overturn. If you are one of the wise individuals who have already purchased a life insurance policy, you are in good luck! Your life insurance policy may be the answer to receiving the quick cash that you need to solve your financial issue. Keep reading for more information needed for understanding life insurance loans.

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What Is A Life Insurance Loan?

For understanding life insurance loans, it is essential that you first understand what the loan type is. First off, there are two kinds of life insurance policies that accumulate a cash component that can be issued in the form of a loan if needed. Those policy types are whole life insurance and universal life insurance—both of those policies are considered permanent life insurances. The older those policies get, the more cash is available in case you need a loan. If you have a term life insurance policy, unfortunately you are not able to receive a life insurance loan because the loan term is a specific time period and there is no cash accumulated on the policy.

Here are the steps that should be taken in order to get a life insurance loan:

  1. Make sure that your life insurance policy allows for you to borrow the money. Again, if you have a permanent life insurance policy, you are ready to move to the next step.
  2. Make sure that there is sufficient cash to borrow. Some insurance policies take up to 5 years to accumulate money.
  3. Figure out the cash value of your life insurance. If your policy payments exceed your cash value, borrowing from the policy may be a bad idea.
  4. Contact your insurance policy agent to request the loan. Here is where you can ask questions concerning your policy and understanding life insurance loans. Also, ask about fees associated with borrowing the cash.

When And How Much?

Understanding life insurance loans means to understand that it can be difficult to pinpoint the right time to borrow the loan from your policy. When a policy is signed, insurance companies very rarely express the length of time you should wait before considering taking a loan from the policy. Also, insurance companies have different guidelines for when the money can be borrowed and how much money can be borrowed. Even if you have determined that your cash accumulation has reached a sufficient amount for you to borrow, the insurance company can still deny your request to borrow the money because of company guidelines. Keep in mind that the money you borrow is not being taken from the money that is being invested in the policy, but the money is coming from the insurance company. When understanding life insurance loans, do understand that the company’s guidelines must be met before the loan can be approved.

Repayment? No Need!

When understanding life insurance loans, you will be happy to know that the money borrowed does not have to be paid back. Think of a life insurance loan as a grant given by the government for schooling—the money is all yours! Although it is an option to not repay the loan, there is a slight downfall to deciding to keep the money. If the loan is not repaid, when the death occurs, the face value of the insurance will be decrease to compensate for the money that was borrowed.

If you want to repay the loan, you can select options to repay in increments or you can talk to your company for information on the interest rates that will be added to the loan.

Convenience of the Loan

The last aspect of understanding life insurance loans is to know what situations will be solved if you take out a life insurance loan. If you find yourself in a situation where you need a regular loan or fast cash, you can request a life insurance loan. This is because the money is already available. Even if you qualify for a traditional loan, borrowing from your policy will mean no repayment of the loan amount, no need to pay interest fees, and avoiding a possible debt threat. If you do decide to pay back the loan, your interest rate will not be as high as it would be on a traditional loan. If you find yourself struggling to pay the annual premium for your policy, you can borrow from the policy to stop it from going into default.

In conclusion, your life insurance policy can come in handy before death in the case that you need fast cash or a loan for emergency purposes. Before settling on a life insurance loan, make sure that your life insurance policy will qualify you for receiving the loan.