How is the Loan Value of a Life Insurance Policy Determined?

The loan value of a life insurance policy loan can be determined from several different factors. A life insurance policy loan can be a great lending tool for those with whole life insurance policies with a cash value. Instead of taking out a loan from the bank, you can simply borrow against your life insurance policy. You will receive more flexible terms, better interest, and other benefits as well. While a life insurance policy loan is attractive, understanding a life insurance policy loan value is important. Here are a few things to consider when determining the loan value of a life insurance policy loan.

Policy Guidelines

The most important part of determining the loan value of a life insurance policy is the guidelines set forth by the policy itself. When you sign up for a life insurance policy, you are given a packet of information surrounding the policy. In that information, there will usually be a guideline that tells you exactly what kind of percentage of the cash value that you can borrow. This is the most important number to keep in mind because you will only be able to borrow what the guidelines of the policy say. For example, some life insurance policies allow a maximum of 90% of the cash value being borrowed. Others allow a smaller percentage. Regardless of what it allows, you will be bound to what the policy says. If you can not find the information on your policy, you can always call the company that offered it to you. They should be able to tell you exactly how much you can borrow.

Cash Value

The cash value that you have built up is another thing that determines how much you can borrow. If you have been paying into the policy for a number of years, you will have a larger cash value to borrow against. If this is a new life insurance policy, you will not have a cash value built up yet. The cash value is made up of a portion of the money you put into the policy. Part of your premiums go towards administration and the death benefit of the policy. The rest goes towards the cash value. Therefore, the cash value will be significantly less than what you have been paying into the policy in premiums. In order to determine the cash value that you have accumulated, you can look at a statement provided by the company or call them directly.

Personal Decision

The most important part of the process is your own decision. Just because you can borrow 90% of the money in your cash value does not mean that you have to. If you only need 50%, then you should only borrow that much. Borrowing the maximum amount of money can put you at risk to lose your life insurance policy. If the amount of interest goes over a certain threshold, your policy will be surrendered.


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