Borrowing from your Life Insurance Policy

Borrowing from a life insurance policy can be done depending on the type of life insurance policy that is in force. Borrowing from a life insurance policy requires having a policy that accrues a cash value, contacting the insurer and knowing how it will affect the policy. The amount borrowed form a life insurance policy can have tax consequences.

A life insurance policy that accrues a cash value is required because the cash value is what is being borrowed from the policy. There are two types of life insurance policies that van accrue a cash value while the they are in force. An insurance company offers a Whole Life insurance policy as well as a Universal Life insurance policy. Each type of policy accrues a cash value as well as earns interest on the cash value amount. The amount that can be borrowed cannot exceed the current cash value amount of the policy.

A policyholder that decides to borrow against their insurance policy will need to contact their insurance company or their agent. When placing a call be prepared to give information such as the policy number as well as your social security number in order to verify that you are the policyholder. You will need to ask the customer service representative how much can be borrowed from the policy and what the total cash value is. The company representative will be able to answer any question you may have about borrowing from your insurance policy.

Borrowing against the cash value of you policy can effect the policy in a couple of different ways. The amount that is borrowed against a Whole Life or Universal Life policy will decrease the amount of paid up premium. When the paid up premium decreases it is important to make sure and pay future premium payments on time. The amount that is borrowed can result in the insurer deducting any outstanding principal as well as any interest that has accrued in the event of the death of the policyholder. It is important to be aware how much is being borrowed from an insurance policy and how it will effect the beneficiaries.

A Whole Life or Universal Life insurance policy can have tax consequences if the amount that is borrowed is not paid back into the policy if it is ever canceled. This is because the amount that is outstanding changes from a loan to earnings that are then taxed. To avoid tax consequences from borrowing from an insurance policy keeping making premium payments until the amount borrowed has been paid back.