What is a Life Insurance Policy Loan?

A life insurance policy loan is a commonly used tool that allows people access to borrow against their policy. While borrowing against your life insurance should not be taken lightly, under the right circumstances, it can be a good decision. There are a few advantages to using a life insurance policy loan as a method to obtain the funds you need. Let's take a look at what a life insurance policy loan is and why it might be a good idea.

Minimal Paperwork

A life insurance policy loan involves minimum paperwork to get started. Most of the time, your life insurance policy will have a section that defines exactly when and how you can borrow against your policy. Some policies allow you to borrow up to 90% of the cash value of your policy. It usually amounts to a simple form that you fill out and then submit back to the company. They will give you the money and the terms required to repay the loan.

Low Interest

Borrowing against your life insurance policy is much different than borrowing from the bank. One of the most advantageous aspects of a life insurance loan is the interest rate that you will get. Most of the time, it will be substantially lower than any other type of loan you could acquire. Anytime you can get low interest, it just makes sound financial sense. Even if it means that you have to borrow against your life insurance policy, it is still to your advantage.

Easier Approval

Getting a personal loan from a traditional lender comes with a lot of background checks, credit checks, and income verification. A life insurance policy loan is a lot easier to come by. Your credit rating is not really a factor in the loan. You are basically borrowing money from yourself because you could cash the policy out instead if you desired. Therefore, you do not face the stiff credit checks that come with other types of loans. If you need the money, you can usually get your hands on it relatively easily.

Flexible Payments

Another added benefit of using a life insurance loan is the flexible terms that come with it. When you start an insurance loan, you are given the money and you can repay the money at will. You are sent a statement every month, but if you don't want to repay the money yet, don't repay it. The interest will still keep accumulating and the longer you wait, the more it will cost you. However, you can make payments at your leisure.

The only catch is that you cannot allow the balance to go over the cash value of the policy. At that point, you will be required to repay the loan or at least get it down below the cash value again. This makes the repayment process a lot easier to deal with than other types of loans.

Should You Borrow?

Taking out this type of loan is a personal decision that should be met with a lot of thought. This is your life insurance policy that is there to take care of your family members. If you lose your policy, your family will be negatively affected if something happened to you. Make sure there are no better alternatives available before making the deal.

 

 


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