The insurance company will either charge interest in advance (up front for the full year) or in arrears (at the end of the policy year). The in-force illustration should also show whether interest is paid out of pocket or borrowed. You can do this by requesting an in-force policy illustration, which shows how the policy’s performance will be impacted if you borrow money, pay back the loan or maintain the loan. How Does a Life Insurance Loan Affect Your Policy?īefore taking out a policy loan, contact your insurance company to find out how the loan will affect the components of your policy. So when policyholders aren’t aware of these implications, APLs can grow quite large, eroding the cash value and causing a policy lapse. “So this type of policy loan can unwittingly accumulate for years.”įlagg says that interest is also added to the balance, often at unfavorable rates. “While insurers generally send notice of such automatic premium loans, consumers don’t often understand the implications,” Flagg says. Automatic premium loansĪn automatic premium loan (APL) allows the insurer to use your cash value to pay your life insurance premiums, if you don’t. If you pay the policy loan before you pass away, there is no deduction from the death benefit. “Either way, policy loans reduce both the policy account value and the death benefit by the amount of the loan on a dollar-for-dollar basis.” “Choosing a policy with a low loan spread can make a big difference,” Flagg says. Usually, this can be as little as 0.25% (even 0% in some cases) or as much as 2%. The insurance company will also charge interest (called a spread).įlagg explains that you essentially pay the interest back to yourself, less a spread charged by the insurance company. For this reason, you don’t have to pay income tax on the money you take out. With a direct loan, you essentially borrow money from yourself, with the policy’s cash value serving as collateral. Policy loans come in the form of direct loans or indirect automatic premium loans, according to Barry Flagg, founder of Veralytic, an independent life insurance analytics company. How Does a Life Insurance Policy Loan Work? These policies do not have a cash value component. Term life insurance is a fairly low-cost insurance option designed to protect people during the years they need it most, such as the working years until their mortgage is paid off. Term life insurance, by comparison, is not life insurance you can borrow from. The cash value portion of the policy either earns interest or is tied to an investment account or index, allowing you to grow the money over time. Permanent life policies build cash value as you pay the premiums. Permanent life insurance (including whole life, universal life and variable life) is designed to provide coverage for your lifetime. Most permanent life insurance policies offer the opportunity to borrow money from the cash value. What Types of Life Insurance Policies Can You Borrow From?
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