Whereas term life insurance only pays out in the event of the policyholder’s passing, whole life insurance is a kind of investment. As such, you can borrow against its cash value in certain scenarios. Naturally, whether doing so is a savvy financial move will depend on the circumstances. If you’re thinking about borrowing against an existing policy, here’s what you should know. 

When to Borrow 

If you’re in a financial bind, borrowing against a whole life insurance policy could be the answer. Doing so does not require a credit check. Additionally, borrowers do not have to worry about exorbitant interest rates like they might if they were to take out a personal loan or use a credit card. However, since cashing out any portion of the policy means a reduced payout (unless you pay it back with interest prior to passing), you should only borrow against your coverage in the event of an emergency. 

If it’s not an emergency and something were to happen before you paid back the loan, it could threaten your family’s financial security. Some of the most common reasons to borrow against a life insurance policy include unanticipated home repairs, medical expenses, or to help with start up costs for a new business. 

How to Borrow

If you want to liquidate a portion of your policy’s cash value, an insurance agent can help. The first step will be confirming eligibility. For example, you must have paid into the policy for long enough to accrue some cash value. Additionally, the account must be in good standing. That means the benefits have not lapsed. 

If you meet the insurer’s requirements for borrowing against your whole life policy, avoid some of the most common pitfalls when doing so. For example, make sure to budget for any anticipated tax consequences of cashing out. If the policy lapses before you pay back the loan in full, you may have to pay taxes on the income you withdrew. Additionally, review the fine print carefully to ensure you don’t risk losing coverage. If the loan and any interest exceed the cash value, the coverage could lapse. 

If you want to protect your family’s financial security by purchasing term or whole life insurance, turn to Brent Layton – Farmers Insurance Group. Based in Tremonton, UT, this seasoned insurance agent has been serving clients throughout Box Elder County for more than a quarter of a century. To request a quote, visit his website. You can also get in touch with Brent Layton by calling (435) 257-3829 or reaching out via email at bclayton@citlink.net.