Borrowing money against life insurance policy

Written by S. Danilina and Fact Checked by The Law Dictionary Staff

A term life insurance policy provides the beneficiary with a monetary benefit for a pre-determined number of years in the event of the death of the benefactor. Term life insurance costs less money than other types of life insurance. Term Life insurance is a popular option for younger individuals who are looking to offer extra security for their loved ones. However, term life insurance has the limitations to its coverage. For instance, term life insurance only provides coverage for a specified term. The term can range from one year to 10 years and depends on the policy a person selects. After the term life insurance policy expires an insured person can usually renew it, but his or her premiums might increase. When the benefactor turns a certain age or develop any chronic illness, renewal of the policy can be denied by the insurance company. Finally, term life insurance policies usually do not have any cash value. Thus, it is very unlikely that an insured individual will be able to withdraw money or borrow against them. A term life policy 's purpose is to provide coverage for the limited time and only pays the insurance benefits to beneficiaries in case of the benefactor’s death.

Thus, borrowing money against a term life insurance policy is not possible most of the times, it is still recommended discussing it with the insurance company. During the discussion, first, a policy holder needs to ask his or her agent if borrowing is even a possibility. If the insurance company confirms that it is possible to borrow against a term life policy, the next step is to ask the agent what interest rate will apply when the policy holder starts the re-payment process. Moreover, it is recommended to ask the agent about the possibility of any undisclosed fees involved. When all questions are answered, the insured person needs to decide if borrowing money against his or her policy is a wise step to take.

If a person wants to have a more secured life insurance policy that lasts the lifetime if all premiums are paid on time, whole life insurance is the perfect option. Whole life insurance is not a short term life insurance and cannot be terminated based on an insured person age or health issues. On the other hand, whole life insurance policy costs more that term life insurance due to the higher risks for the insurance company.

Moreover, a whole life policy has one significant difference from a term life insurance. A whole life insurance, unlike a term life insurance starts building cash value immediately when the policy starts. It accumulates cash value due to a higher premium on a whole life policy than needed to be, so the excess can accumulate value. Usually, after an insured person had the policy for a few years, he or she will accumulate a cash value higher than the death benefit. Thus, anyone can always borrow money against his or her whole life policy as long as the person has some accumulated cash on it. Borrowed money can be spent on anything, including bills, home repairs, car purchases and etc.

Finally, even though a policy holder has essentially just borrowed his or her own money, the loan taken against a whole life policy is required to be repaid with an interest. If the borrowed amount is not paid back before an insured person passed away, the money he or she borrowed will be deducted from the amount that his/her family receives in the event of the benefactor's death. Therefore, before borrowing against your whole life insurance or in some cases your term life insurance, consider other loan options that will not affect the policy benefits your family will receive.

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