How Long Do You Need to Have a Life Insurance Policy to Take a Loan on It?

Whole life, variable life, and universal life products all have a cash value at some point. Initially the cash value builds slowly, but as the years pass, the increase is much more rapid. The cash value is yours to borrow for any use and there's no need to pay it back. If you die, the insurance company subtracts the loan from the death benefit.

Guarantee

Whole life products have a guaranteed cash value. This means you can look inside the policy for a chart that tells how much per thousand you've accumulated. First, find on the chart for the age you took out the policy and place your finger on that age. Next, go down the side of the chart to the number of years you've had the policy. If you bring your finger down to the line for the number of years, it gives a figure. If the figure is nine, multiply that times the number of thousands of insurance. If your policy were for $100,000, you'd multiply it times a hundred with an answer of $900 available.

Surplus

Universal life and variable life require a surplus of funds. If you fund the policy with the minimum amount your cash value won't grow rapidly and it may take as long as five years to develop cash value. If you pay extra each year, then your cash value grows quicker and is available for use sooner.

Surrender Charge

You have to take into consideration the amount of surrender charge you'd have if you cashed in the policy. Even though you may have cash value in the first few years, there's a surrender charge if you cancel the policy. This holds true for loans. The insurance company only allows you to borrow up to the amount you'd receive if you cashed out the policy. It insures they receive the surrender charge if you borrow to the max and then cash out your policy.

Interest

You pay interest on your loan if you have the money available. The good news is that it also grows as though the money were still in the policy. In effect, the difference between credited interest and loan interest is normally a fraction of a percent. This amount covers the cost of record keeping at the insurance company.

Minimums

You may build cash value in the first five years but in order to borrow from it, it has to reach a minimum amount. Normally companies won't loan amounts smaller than $250.

Time Frame

The larger your premium, the sooner you'll have enough in the policy to borrow. Small policies may take as long as 10 years before they have cash available to the owner. Large insurance policies with huge premiums may only take a couple of years.

Paperwork

Some companies require that you fill out a form before they send the money. There's no loan rejection as long as the money is available, they just want your policy number, the amount and your signature. Other companies allow you to make a loan by phone.

References

• MoneyInstructor.com
• FinancialWeb
• MoneyMattersInc