What limits the amount that a policy owner may borrow from a whole life insurance policy? Although it’s not advisable to borrow against your life insurance value if needed, you can borrow an amount you need because people would take out a loan from their coverage in an emergency.
The insurance company can’t refuse your request for a loan as long as there is still money in your account and you didn’t use it up entirely. But do expect that there will be an interest with your loan.
The interest rate is usually 5% but if your insurance policy is up for the last 10 years, then your company might agree with a zero cash loan.
There are many more things that you should know about the topic, just delve deeper!
What Limits A Policy Owner To Borrow From Their Whole Life Insurance Policy?
The only thing that limits policy owners from borrowing from their whole life insurance policy is no money left to borrow. Moreover, although you can exceed the amount you want to borrow from what you originally have in your policy, it would still depend on how much money you have. And the interest rate could contribute as well.
For the quick answer, the insurance’s cash value is the one that will limit the loanable amount. That is usually what limits a policy owner’s amount from a whole life insurance policy. Regardless, learn all the advantages and disadvantages of borrowing money from a life insurance policy, read on.
Advantages Of Borrowing Against Your Life Insurance Policy
Yes, there are several options that one can take if a financial emergency arises. But people would choose to borrow against their policy because it comes with various advantages. We will discuss some of them below.
#1. Higher loan value
Insurance companies offer varying loanable amounts against an insurance policy. But in most cases, the policyholder can get up to 90% of the policy’s surrender value.
When we say surrender value, it pertains to the amount you can receive when you decide to terminate your coverage.
#2. Quick loan availability
You can get a loan quickly without much paperwork through your life insurance policy. Unlike other loan types, you need not go through the cumbersome and lengthy application process to get a loan. Also, there are minimal delays in getting the loan. Typically, the application will only take about 3 up to 5 days.
#3. Lower interest rate
Generally, the interest rates that insurance companies charge on loans against life insurance are lower than personal loans. However, this will depend on the premium (definition of premium) that the policyholder has already paid and the frequency of the payments made.
The higher the accumulated premium paid and the more frequent payments are made, the lower the interest rate of the loan will be.
For instance, if wealth is the collateral of an insurance policy, it will most likely bear a lower interest rate than uncollateralized loans. Recently, personal loans are bearing interest rates of 12 up to 15 percent. Consequently, for loans taken against a whole life insurance policy, the interest rates vary.
But it is commonly lowered than interest rates charged for personal loans. Looking back at the previous trends, the interest rates that insurance companies charge to loans against a whole life insurance policy usually range between 10 up to 12 percent.
#4. Loans require limited scrutiny and are generally secured
In the loan application, you pledge your coverage to be the security of loan repayment in case of nonpayment. That is why you are getting a lower interest rate. Given the loan’s security, scrutiny is limited, and there is a quick loan disbursement.
The lender will typically evaluate the borrower’s credit scores and charge interest rates accordingly in taking out other loans. Meaning to say, the interest rate will vary depending on your credit score.
Disadvantages of Borrowing Against Your Life Insurance Policy
There are also some downsides to taking out loans against your whole life insurance policy. We will be discussing some of them in this section.
#1. A smaller amount of loan in the initial years of the policy
Most people thought that they could get a loan up to the sum of the whole policy, but it is not true. You can only loan against the surrender value of the policy. Since it will take several years before one can accumulate a significant amount of cash value of their insurance policy, the policyholder may only take a limited amount. Therefore, it is advisable to check with the insurance provider first whether or not you can take a loan against your policy.
Even if you can loan out up to 90 percent of the policy’s cash value, taking a loan in the policy’s early years would mean that you will only be entitled to a low amount since the accumulated cash value is still low.
#2. Waiting period
You cannot take out a loan from your insurance policy immediately after buying it. The waiting period would typically range from about three years. The insurer will check if you paid for the premium or defaulted it within the waiting period of three years. Furthermore, the loan sanctioned will be based on the cash value.
#3. Not all types of life insurance policies are loanable
A loan is only common among traditional insurance plans. You cannot take out loans from a term plan. Policies included in traditional plans are whole life, money-back plans, endowment policies, among others. In these types of policies, return is guaranteed.
#4. Default on loan repayment
If there is a default in loan repayment or default in future premium payments, your insurance policy plan will lapse. It is expected to pay both for the policy’s premiums and the interest of the loans taken.
Therefore, the insurer is eligible to recover both the interest and principal of the policy’s cash value. And these are what limits the amount that a policy owner may borrow from a whole life insurance policy.
It’s A Wrap!
As we discussed in this post, the cash or the surrender value of the loan is what limits the amount that a policy owner may borrow from a whole life insurance policy. So again, the cash value is the amount that is available to the owner of the policy. In contrast, you might not relate this article to this one on how to replace water-damaged door frames, but it’s as informative.