Borrowing against your life insurance policy can be a way to access funds when you need them. Here's how it generally works:
1. Cash value: When you have a permanent life insurance policy, such as whole life or universal life, a portion of your premium payments goes into a cash value account. This cash value grows over time and can be used for various purposes, including borrowing against it.
2. Policy loan: To borrow against your life insurance policy, you can take out a policy loan from the insurance company. The loan amount is typically limited to a percentage of the cash value of your policy. The loan is secured by the cash value and the death benefit of the policy.
3. Interest: Like any other loan, a policy loan accrues interest. The interest rate is set by the insurance company and may vary. It's important to note that if you don't repay the loan, the interest will continue to accumulate, potentially reducing the death benefit of your policy.
4. Repayment: You have the option to repay the loan in different ways. You can make regular payments of principal and interest, or you can choose to pay only the interest. If you don't make any payments, the outstanding loan balance will be deducted from the death benefit when you pass away.
5. Impact on policy: Borrowing against your life insurance policy can have implications. The loan amount, plus any unpaid interest, will be deducted from the death benefit when you die. This means that your beneficiaries may receive a reduced payout. Additionally, if the loan balance exceeds the cash value of the policy, the policy may lapse.
It's important to consult with your insurance company or financial advisor to understand the specific terms and conditions of borrowing against your life insurance policy. They can provide guidance on the potential impact on your policy and help you make an informed decision.