How soon can you borrow against a life insurance policy?
What you need to know about life insurance loans
The main reason to buy life insurance is that it can provide a death benefit: a sum of money that is paid to your beneficiaries in the event of your untimely death. But if you currently have insurance, you may be wondering, “Can I borrow money from my life insurance policy? The answer could be yes – but it depends on whether your policy builds cash value.1 Life insurance loans can be a cheaper alternative to credit cards and bank loans.2 But how quickly can you borrow money against a life insurance policy? And is it always a good idea? This guide will help you understand:
How life insurance loans work
How quickly you can get a loan after you take out a policy
Pros and cons to consider
First and foremost, is a policy loan possible with your type of life insurance policy?
Some life insurance policies can be borrowed, while others cannot.
Permanent life insurance – endowment insurance – aims to protect the policyholder for life.3 These types of policies have a cash value component that builds up over time and allow for policy loans.
Life insurance provides limited protection for a set period of time (e.g. 10 years). These are sometimes called “pure life insurance” because they have no cash value component and do not allow policy loans.
Cash value is the most important component of building a life insurance policy’s wealth and can grow high enough to support policy loans – you cannot borrow against the death benefit. When you first buy a life insurance policy, the cash value is usually $0. With each additional premium payment, a portion of your premium can grow tax-free over time as part of the cash value component.4 Insurance policies typically do not build a significant cash value – in other words, not enough to borrow against – during the first two to five years of the policy.
The cash value increase is also calculated differently for each life insurance and universal life insurance: in some cases, it is tied to a guaranteed interest rate, and in other cases, the cash value increase is linked to a variable market trend, such as a stock index. Depending on how quickly the cash value of your particular policy grows, it may take more or less time to build up a value high enough to provide security for a loan.
General rules for life insurance loans
Each policy and life insurance company has different rules for life insurance loans. So check with your life insurance agent or life insurance company for details. However, there are some general rules that most policies follow:
You can generally only borrow against permanent life insurance policies, including whole life insurance, standard universal life insurance, variable universal life insurance, and indexed universal life insurance.
For term life insurance, credit is generally not possible
You can usually not borrow more than 90% of the current cash value of your policy
You will typically have to pay interest when you repay the loan
No repayment is required, but outstanding loans are deducted from the death benefit and may cause the policy to lapse for certain types of policies.
How long does it take to get a loan based on life insurance?
In principle, you can borrow money from your life insurance policy when the cash value reaches a certain minimum amount. However, the prerequisite for taking out the desired loan is that the present value balance also reaches a sufficient level to be able to secure the desired loan amount. Depending on the terms of your policy, the increase in the cash value and amount of your policy, and the amount you want to borrow, this can take anywhere from two to ten years or more from the date you purchased your policy. While this may seem like a long time, remember that the policy is designed to last a lifetime – and will provide you with a full death benefit from the first day the policy takes effect, even if you cannot take out an insurance loan.
How much can you borrow?
The rules vary, but life insurance companies usually allow you to borrow up to about 90% of the current cash value of your plan. This means that if you have $5,000 in cash value from your life insurance policy, you may be able to borrow up to $4,500. Keep in mind, however, that your policy serves as collateral for the loan. If you die after borrowing money under your policy, the outstanding loan amount is typically deducted from the death benefit paid to your beneficiaries.
The process can take just 2-3 weeks. Here’s how it works:
Assuming your policy meets the loan criteria outlined above, you can submit an insurance loan application to your insurance company. The application process is usually much simpler than a regular bank loan, and many lenders allow you to apply online. However, contact your insurance company or agent for more information.
After you submit your application, you will need to wait for it to be processed. This can take anywhere from two weeks to a month, but varies depending on the provider.
Once your application is approved, the money will generally be transferred to your bank account within a week.
From there, you can spend the money as needed.
When taking out a loan, it is always important to weigh all the options. This is what you should pay attention to when taking out a loan from a life insurance policy. click for more
