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Advantages and Disadvantages of a Life Insurance Policy Loan

Advantages and Disadvantages of a Life Insurance Policy Loan

A permanent life insurance is that which provides the policyholder financial coverage for a lifetime. The other name of a permanent life insurance is cash value life insurance. In this type of insurance policy, the premium that you pay is divided into two parts. One part goes into securing your regular life insurance balance and the other part involves the cash value account where a part of the premium is added so that it can work as a savings account. A modest rate of interest is added to the cash value account without the imposition of any tax.

The best thing about a permanent life insurance policy is that you can borrow money from it given your cash-value account looks well. The other good thing about a cash value account is that it increases the value of a death benefit, that is, upon the unfortunate demise of the policyholder, the nominee(s) receives the death benefits as well as the cash value funds with the interest. But there is a process as to how the beneficiaries(s) can secure that cash value. One wrong move means that the money you have raised for so many years will go to the insurer instead of benefiting your near ones. Once you see that your cash value account is strengthened enough, add it to your insurance scheme. Funds from the cash value account can also be used to pay the premiums pertaining to the life insurance scheme.

The pros and cons of life insurance policy loans

Though you can avail of a loan against a life insurance policy, it has its downsides too. First, we are going to talk about the advantages of a life insurance policy loan.

Pros:

  1. 1. Using your permanent life insurance to borrow money is very easy. You do not need to fill up an application form or spend long hours to get yourself registered. You get the loan without any questions asked. You need to enter your common details in a very brief form in order to receive payment.

Loan

 

  1. 2. You simply need to have enough cash value in your cash-value account in order to receive payment right away.

 

  1. 3. Your transaction does not reflect on your credit report.

Credit Report

 

  1. 4. The loan interest that you need to pay is also lower compared to other mediums, such as, a credit card.

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  1. 5. You are not even under any obligation to pay back the loan, because, after all, you are using a large part of your personal funds to fulfill needs.

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  1. 6. Even if you wish to pay the loan back in order to keep your cash value account secured, you are not allotted a fixed tenure. You can choose a tenure that suits your convenience.

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Cons:

Here are some of the disadvantages of a loan against a permanent insurance policy:

  1. 1. The cash value account that is a part of a permanent insurance policy takes a long time to build up. So it will be many years before you can use it as a money-lending tool.

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  1. 2. In case you fail to pay the loan before your demise, the death benefit can be reduced.

Life Insurance

 

  1. 3. You stand a chance of losing complete hold of your policy in case the loan’s interest surpasses the policy’s cash value.

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  1. 4. In case you fail to repay the complete loan and your policy lapses, the tax can be implied on the money that you haven’t paid, thereby increasing your burden.

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Follow these tips to draw out a loan against an insurance policy

  1. 1. From the time you begin to start investing in a cash value account, the interest starts adding up. In case you wish to draw out a loan from that account, make sure you know the accrued interest rate.

Interest Rate

 

2.Set a tenure period and pay the loan in full.

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  1. 3. Talk to your financial adviser before taking any drastic steps.

Consult

 

  1. 4. If you think that you are fully covered, reap the benefits of a loan against a permanent insurance policy.

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Harshit Jain

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