Borrowing against a life insurance policy means taking a loan from the cash value that has built up within the policy over time. Here's how it works:
When you pay premiums for a permanent life insurance policy (like whole life or universal life), a portion of those premiums goes into a cash value account. This cash value grows over time through interest or investments, and you can access it while you're alive.
Borrowing against the cash value is like taking a loan from yourself. You're essentially using your own money as collateral. The loan doesn't require a credit check or approval from a bank because it's your own policy's value that you're borrowing against.
This can be helpful in various situations. For example, you might need money for an emergency, to pay for education, or to cover unexpected medical bills. Borrowing from your policy can be quicker and easier than applying for a traditional loan. Plus, the interest rates on these policy loans are often lower than what you'd get from a bank.
However, there are things to keep in mind. First, the loan needs to be paid back. If you don't repay it, the outstanding amount will be misused from the death benefit that your beneficiaries receive when you pass away. This could reduce the amount they get. Additionally, not repaying the loan could result in taxes.
Also, the loan can affect your policy's growth. The cash value serves as a type of savings or investment, and borrowing against it can slow down its potential growth.
In short, borrowing against a life insurance policy can be a way to access funds for various needs, especially if you're unable to secure a loan from a bank. It offers flexibility, but it's important to remember that the loan should be repaid to avoid impacting the policy's benefits and value. It's a decision that should be made with careful consideration of your financial situation and long-term goals.
