How to Use Insurance Investments for Loans

Your life insurance policy can serve as more than just a death benefit for your family should you pass away unexpectedly. It is also an investment. There are two types of life insurance policies: whole life and term life. Term-life insurance policies are valid for a temporary period and serve only to pay a death benefit. Whole-life policies, however, are valid indefinitely and are very versatile. A whole-life policy builds a cash value you can borrow against to make investments, pay off debt, or use in emergencies (see References 1). When you borrow against your life insurance policy, you are taking out a loan using the equity in your policy as collateral. Like a bank loan, interest will accrue on the balance you owe until the loan is repaid.

Difficulty: Moderately Easy

Instructions

1. Gather together and review your insurance policy paperwork. The loan amount you are eligible for depends on the amount of time you have held the policy and how much equity has built up over that period. The older a policy is, the more equity has built up and the more you can borrow. You must be the owner of the policy to request a loan against its equity.

2. Call the insurance company and explain that you are considering taking out a loan against the policy. Request that the company mail to you a copy of the terms and conditions for insurance loans. Review the terms and conditions your insurance company has for individuals who wish to borrow against their policies to avoid paying any surprise fees (see References 2).

3. Make a list of any questions about the amount of the loan, your repayment interest rate, or your insurance company's lending policies. Contact an insurance representative to obtain answers to your questions before moving forward with the loan.

4. Talk to your insurance agent and explain that you are ready to take out the loan. You will not be required to undergo a credit check or an application process, but you may be required to sign paperwork verifying your ownership of the account and the amount you are borrowing. Your paperwork will be mailed or faxed to the home office so that your loan can be processed.

5. Wait for your check to arrive in the mail. The length of time this will take varies depending on your insurance provider.

6. Pay back the loan if and when you are financially able. Payments on an insurance loan do not have to be sent on a set schedule. You may also opt not to repay your insurance loan at all, but doing so will result in the amount of the loan, plus any interest the outstanding loan has accrued, being deducted from the amount your beneficiaries receive when you die (see References 3).

References

• SmartMoney: Term or Whole Life?
• "Managing Debt for Dummies;" John Ventura and Mary Reed; 2007
• Borrowing From Your Life Insurance