Can I Take Out a Loan On My Life Insurance
Did you know that if you need a substantial amount of cash, your life insurance policy could come to your rescue? That is right. You can borrow nearly 95 percent of the surrender value of your life insurance policy in any given year.
The rules related to taking out a loan from a life insurance policy vary from company to company, which is why you need to understand them to find out how much and when you can borrow against your policy. Your insurance broker can shed more light on this matter.
When Can You Take a Loan Against Your Life Insurance Policy?
When you can borrow against your life insurance policy, it depends on the concerned insurance company's rules. Some insurance companies provide the option of borrowing against the policy as soon as it has the cash surrender value.
For other companies, you may have to wait a specific period before borrowing against your policy.You need to wait two years from the policy start date to take out a loan in most cases. It is usually rare to wait any longer than two years.
The best part is, other than the two-year waiting period, and there are no other loan eligibility conditions. There is also no specific time when you can apply for a loan.
How Much Loan Amount Can I Borrow?
There is no universal rule on how much cash surrender value you can receive as a loan. The availability of the maximum loan amount depends on the insurance company and its regulations. Usually, policies allow up to 95 percent of the cash surrender value.
For example, you have a life insurance policy with a $100,000 cash surrender value, and the annual policy loan interest rate is 5 percent. If the insurance company allows borrowing a maximum of 95 percent of the cash surrender value, you can get up to $95,000.
Now, one year down the line after taking out this amount, the accumulated interest rate on loan (without any repayments) will be $4,750. If you wish to add the interest to the loan balance, the balance will become $99,750, which is still below the cash surrender value of $100,000 when the loan started.
Generally, insurance companies do not set the maximum loan amount below 90 percent of the cash surrender value. Also, the cash surrender value determines how much you can take out against a life insurance policy. For more details, consult an experienced insurance broker.
Does The Maximum Available Loan Amount Change?
The answer is,"yes." The maximum amount of loan that you can take out can change based on the following scenarios:
- Change in the loan interest rate
- Change in product type
- Change of loan type.
Change in the Loan Interest Rate
The maximum loan amount you can take out from your life insurance policy can reduce if it has a variable loan interest rate.It happens because the insurance company will not allow you to borrow an amount that will eventually become larger than the cash surrender value during the first year of the loan.
If we take the example used earlier, assuming the same life insurance policy has a variable loan interest rate. After a few years, the rates become 10 percent instead of 5 percent.This will change the maximum loan amount you can take out. It means the same $95,000 loan will add up to become $9,500 in loan interest in one year, and after adding to the $95,000 loan balance,the total loan will be $104,500 after one year.
Change in the Product Type
According to the product type, the rules of borrowing against a life insurance policy are different even for the same company.
A whole life policy is likely to have a different loan interest rate than a universal life insurance policy. It will affect the maximum available loan amount.
Change of Loan Type
There are life insurance policies that even allow more than one loan option. For example, indexed universal life insurance (IUL) is one such policy. Most IUL policies provide a minimum of two (or more) loan options to policy owners.
These various loan options often have different maximum available loan amounts. It is due to the difference in the loan interest and the functionality of the insurance. You will get a higher maximum available loan amount on a fixed loan than the indexed loan because these loan types' annual interest rates are different.
Before We Go
If you are looking for more information regarding how to borrow against your life insurance policy, you can contact your insurance company for details. If you are yet to buy a life insurance policy, a reputable insurance broker can guide you and inform you about the best possible policies available on the market.
A representative or an insurance broker of the company will walk you through all the aspects, including the maximum loan amount the policies offer. You can request a free life insurance quote by filling out this online form or can call us at our toll-free number 1-888-505-7988.
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