Can I Borrow Against Universal Life Insurance?
Universal life insurance is a flexible premium policy with the capacity to build up cash value, or savings, in the policy. The savings may earn interest, or the insurance company may invest the savings in mutual funds, known as a variable universal life insurance policy. You can, in theory, borrow against the cash value in your universal life insurance, if you have enough cash value in the policy.
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Overview
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Universal life insurance pays a benefit to designated beneficiaries when the person insured by the policy dies. There are two death benefit options for universal life insurance, and you can switch between the two over the life of your policy. One option is a level death benefit, meaning the face amount stays the same regardless of the cash value in the policy. The other option is your initial death benefit plus your cash value. For example, if you take out a $100,000 policy, and after 15 years, your policy has $20,000 in cash value, your death benefit would be $120,000.
Cash Value
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Your policy's cash value grows each year you have the policy, provided you're paying enough in premiums. Since universal life insurance premiums are flexible, if you lower your payments too much, you may not build up any cash value at all. You can also overpay and force the cash value to build up faster. If you have a variable universal life policy, your cash value may fluctuate, so there may be times when your policy doesn't have enough cash value for you to borrow. Policies also have surrender charges the first 10 to 15 years you own the policy, and your cash value must exceed the surrender charges for you to borrow against it.
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How to Borrow Against Your Cash Value
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If you'd like to borrow against your cash value, contact your insurance company. Ask for your cash surrender value and confirm that's the full amount you can borrow if you choose. Ask for a loan request form, and fill it out carefully when you receive it. Mail or fax it back (make a copy for yourself if you're mailing it). You should receive, at a minimum, a letter letting you know the company is processing your request, and the check shortly after that. If you haven't heard anything, contact your insurance company for the status of your request. Borrowing against your cash value usually takes time, so if you need the money immediately, it may not be the best funds source. Still, it can't hurt to ask if it can be expedited or if the check can be mailed overnight to you.
Alternatives to Borrowing
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A unique feature of universal life policies is that you can also withdraw cash value from the policy. The main advantage to withdrawing money is that you're under no obligation to repay it. With borrowing against cash value, you're required to pay it back with interest, and if you don't pay it back, interest on the loan will accumulate. If you never repay the loan, the amount you owe will be deducted from the policy's death benefit. A cash value withdrawal, though, only affects the cash value if your death benefit option is the amount of your policy plus the cash value. If all the cash value is withdrawn, the death benefit returns to the initial amount.
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