Borrowing Against Your Life Insurance Policy

When life throws you the proverbial curve ball and you need money immediately for bills, medical expenses or other problems, you might not have a whole lot of options. However, if you own a permanent life insurance policy, you should know that the policy does accrue a cash value over time. By law, you are legally entitled to borrow against your life insurance policy whenever necessary.

Often, borrowing against your life insurance policy can be more attractive than taking out a different type of loan. For one thing, there are no penalties if you are unable to pay the loan back right away. The amount that you borrow against your life insurance policy is simply dedicated from the face value of the policy - and of course, you won't be able to borrow that money again. If, at a later date, you decide you want to put that money back into your life insurance policy, you can do so at any time.

For example, let's say that you have a $100,000 life insurance policy, but you run into trouble with medical bills and must borrow $10,000 from it. If you elect not to pay back the $10,000, you won't be charged interest or penalties, but the final payout on your life insurance policy will be $90,000 instead of the original $100,000.

However, if you do decide to pay back the loan, the principle (in the above case, $10,000) will be subject to interest payments. This is because insurance companies make their money through outside investments. When you borrow against your life insurance policy, the insurance company no longer has that amount to invest, and must make its money back by charging you interest if you pay it back.

Before borrowing against your life insurance policy, talk at length with your insurance representative to determine whether or not it will be a good idea. In most cases, the interest payments on your life insurance policy will be lower than those for a loan from another type of financial institution. However, some life insurance companies will charge extra fees against the baseline of your policy which can add up rather quickly. Make sure that all of the possible fees and interest rates are disclosed up front. If you decide to borrow against your life insurance policy, you will probably be able to borrow up to the full amount of the policy itself.

Borrowing against your life insurance policy is not regulated in any way. You can use the money for medical bills, college tuitions or for remodeling your house. There are also no regulations that say you must pay it back; you can choose to pay back the full amount of the loan, part of the loan, or none of it at all. You can also choose to cash in the entire amount of the life insurance policy if you so desire.

You should remember, however, that if something were to happen and your life insurance policy was depleted, there would be no money left over for your loved ones. Think carefully about borrowing against your life insurance policy and have a plan for creating a new policy or for paying it back some time in the future.