Borrowing from Life Insurance

In these days, when bankers are putting every loan applicant under a microscope, credit may be hard to come by. Even customers with sterling credit scores may have trouble prying a loan out of the clutches of banks that have tightened their lending standards. But there may be a source you can tap into without worrying about whether you qualify for that loan. If you bought a whole life insurance back in the day, it has probably built up a cash value that you can use to finance anything you may need money for.

When you turn to your whole life policy for needed cash, you can borrow any amount up to the cash value that has accrued in the policy. If you pay the loan back, you’ll be charged a fairly competitive interest rate, but you can also choose not to pay it back. If you don’t, the value of the loan and any accrued interest will be taken out of the death benefit if you die. If you have a $100,000 policy, for example, and you borrow $10,000, the benefit payout will be $90,000, less any accrued interest

Insurance consultants warn that policy loans should be considered as a source of emergency cash when no other options are available. In addition to the lowered death benefit, there is a danger that, if you choose not to pay back the loan, the accrued interest can push the loan past the total cash value in the policy. In that case, the insurance company could cancel the policy and the loan would then be considered ordinary income, so you’ll owe taxes on any amount above your premium payments.