At some point most of us find ourselves needing a quick cash boost. Something many people don’t know is that if they have a life insurance policy, there’s a possibility that you can borrow against the cash value you’ve accumulated over time.
First, let’s talk about the difference between what you’re life insurance policy amount is for and what cash value means. If you purchase a life insurance policy for $20,000, if something happens to you after a certain amount of time, your beneficiary will be paid the amount you took the policy out for, as long as you continue paying your monthly insurance payment.
Cash value is totally different. When you make your monthly life insurance policy, it starts to build up a cash value that eventually might increase how much the beneficiary payment will be later on down the road. For instance, if you’ve taken out a $20,000 policy but you’ve paid your policy on a consistent basis for 10 years, not only does the amount of the payout increase, but you start earning a cash value based on what your monthly payment is. If that happens, your beneficiaries will receive more than the initial value of your life insurance policy.
That’s a discussion you’ll want to have with your insurance agent because the more you’re willing to spend monthly, the quicker the cash value amount will increase, along with the insurance payout. With many types of insurance policies, all you have to do is pay a certain amount monthly and the amount of the policy stays where it is until you pass away, and it goes to your beneficiaries.
The terms are quite simple, yet you need to qualify to borrow against your cash value. With policies like whole or universal, if you pay more monthly, you not only increase how much your beneficiaries will get, but it increases the cash value of your policy, which is the part you can borrow against. Some life insurance companies allow you to make much larger payments than needed for the requested death benefit, in which case your cash value will grow faster. For other companies, you’re allowed to pay more, but they might have a limit on how much more you can pay depending on how much you’re looking to pay to your beneficiaries.
With that information, let’s go back to the possibility of your need to take out a loan against your policy’s cash value. You can take out all of it, or a portion of it, and the truth is that you never have to pay it back. The other truth is twofold.
One, if you don’t pay it back, you’ll still be charged an annual percentage rate of between 5% to 8%, which is relatively low when compared to other types of loans. Two, if you don’t pay it back and you don’t pay the interest, the penalty goes against the death benefit, starting with the cash value if you didn’t take it all out, and then dwindling the amount you created your policy for. However, as long as you keep paying your monthly payments, over time you might recover some of that debt so the loss won’t be critical.
What happens if you decide to pay it back? You contact your insurance company and ask how to make payments to bring the cash value back up to where it used to be. Some companies will allow you to increase your monthly payment so that over time you’re building it back. If you want to make bigger payments to close the gap sooner, they’ll help you set up that option based on their policies.
Something else you should know is that if you take a loan against the cash value of your policy, it’s non-taxable, unlike if you invested in the stock market, since it doesn’t count as income. That’s going to be helpful in the long term, especially if you end up needing the entire cash value you’ve previously accrued.
If you decide to go through with your loan, you can call and talk to a representative, try to call your agent, or if you’ve created an account online you can go through the portal. However, we’d recommend you talk to someone so you can ask all the questions you might want answers to before you do it. It always helps to know everything that’s going on so you’ll know what to expect. After the transaction goes through, you’ll receive information through the mail telling you what’s happened and how things will go from that point.
We hope you never have to go that route, but it’s a nice buffer if you need something now rather than in the future.