How much of a loan am I allowed to borrow from a life insurance policy?

Answer 1

Generally, you can only borrow money from the following types of policies: 1. Whole Life (aka Ordinary Life, Cash Value Life) 2. Univeral Life 3. Variable Life Note: there are a few others which are much more uncommon, generally speaking. Note: there are some Term Life policies that accumulate cash in the form of Dividends (which can be either anticiapated or unanticipated) and interest paid on accumulated dividends. This type of "cash" can be withdrawn but it cannot be put back. 1. Whole Life The money which can be borrowed from a Whole Life policy are funds which are known as the "Guaranteed Cash Value". These funds generally take many years to accumulate (5 to 20 or more years) before their is any meaningful value (acknowledged subjective). The easiest way to understand just exactly what Guaranteed Cash Value (GCV) is, would be to imagine this increasing value (GCV) to represent the portion of the policy "Death Benefit" that has become liquid. This "liquid" Death Benefit is one of the features that allows a company selling the policy to keep the premiums level for the life of the insured. It must be understood that when you borrow these funds out of the policy, you have removed some of the liquid Death Benefit. Therefore, if you should have a claim (die), this portion which you borrowed (and have not paid back) would be deducted from the Death Benefit that is paid to your beneficiary. It is also important to understand that the Insurance Company will charge you interest on the money you borrow. The reason for this is that the money is no longer available for the Insurance Company to use in generating a gross return on its invested assets. 2. Universal Life The same scenario as 1. Whole Life above, excepting that the funds in a Universal Life policy that can be borrowed are simply know as Cash Value. A very important negatine characteristic of Universal Life is that borrowing money, which results in interest being charged on the borrowed balance, can cause the policy to terminate from inadequate funding. A lengthy explanation would entail but is not really necessary for the layman. Just know that you should make sure you are getting good advice on the effect of borrowing and the interest charges when you have this type of policy. There is a small percentage of Life Insurance Agents that are only interested in getting you to buy a policy and might not be giving you the best information, so call the company directly and get a printout that depicts the effects of borrowing money for a length period. (Stress point: I do mean a small as in a very small percentage of Life Insurance Agent. The vast ... vast majority of Life Insurance Agents are good people who are looking out for your best interests). 3. Variable Life The same scenario as above except that your money in a Variable Life policy is generally "invested" in "sub-accounts" (read mutual funds, not literally) and consequently is subject to much more "market risk" than funds in a Universal Life policy which are invested in the "General Account" and where the rate of interest earned is the only variable factor with direct relation to the Cash Value.