How Much Money Can I Borrow From Whole Life Insurance?
- The amount of money you can borrow from your whole life policy is determined by the amount of available cash value in the policy. Your available cash value is the amount of cash value after surrender charges, minus existing policy loans and interest. A surrender charge is sometimes confusing, because it is not levied unless you terminate the policy. The surrender charge is the penalty you pay for cashing out your whole life insurance policy prior to a maturity date specified in the contract. Maturity dates may extend five years, 10 years or longer from the original date of purchase.
- When you borrow from your life insurance policy, none of the money in the policy leaves the policy. Instead, the insurance company sends you money as a loan. The company secures the money that actually exists and is not already pledged or secured for another loan you have previously taken out. The loaned funds are charged interest. You may choose to pay this interest out of pocket or have the interest charged to the policy cash values. If you choose to have the interest charged to the cash values, the policy loan interest is not be deducted from the cash value account until the policy terminates or is paid out as part of a death benefit. All loans and all accumulated interest charged to the policy cash values reduce the amount available for future withdrawals.
- The benefit of borrowing from your whole life insurance policy is that your policy loans are tax-free. This means you can access the gains in your policy indirectly through life insurance policy loans, and you can use these funds for any purpose, without paying income tax on the proceeds.
- The disadvantage of whole life insurance policy loans is that the insurance company charges interest on the loan. While some insurers charge little or no interest, there is no guarantee or mandate that an insurer must charge a low interest rate. These interest rate costs could accumulate against the cash value of the policy over time, causing it to lapse. If the policy lapses, all loans are forgiven and treated as income. This means former policy loans are taxed at ordinary income tax rates. However, only the gains are taxed. An amount of money equal to the total amount of premiums you've paid into the policy is exempt from taxation.