Connections for Success



Risky Business: Borrowing Against a Life Insurance Policy
Jeffrey R. Green

Nearly everyone finds themselves short on cash to pay expenses from time to time, whether it is a mortgage payment, college tuition, medical bills or unexpected home or car repairs. If you own permanent life insurance — such as whole or universal life — one option for covering these expenses is to borrow against your policy’s cash value.

Most permanent life insurance policies allow you to take out loans, often in amounts as high as 90% or more of your policy’s cash value. These loans generally are attractive because they are usually cheaper and faster than traditional bank loans or lines of credit. However, they also come with risks, so it is important to understand what you are getting into.

Notable advantages

Insurance policy loans offer several important advantages. For starters, they are fast. As long as you have enough cash value and you meet any eligibility requirements, you can take out a policy loan simply by completing a form. There are no detailed applications, credit checks or income verifications, and you usually receive the money within a few days. Additionally, life insurance loans do not appear on your credit report or affect your credit in any way.

Another big advantage is cost. Interest rates for insurance policy loans are usually lower than those for traditional personal loans. Plus, these loans can offer flexible repayment terms. You repay the loan according to your own schedule — you may even elect not to repay it at all, although that is rarely a good idea.

You may have heard that one of the advantages of borrowing against an insurance policy is that it is essentially “borrowing from yourself.” There may be some truth to that statement with respect to retirement plan loans, but it is not true of insurance policy loans. The funds for these loans do not come out of your policy. Instead, they are advanced by the insurance company or its affiliate, using your policy’s cash value as collateral, and the interest you pay goes to the insurer or its affiliate. This may actually be an advantage, though, because your cash value will continue to grow through investment earnings or interest even if you have an outstanding loan.

Potential risks

Borrowing against an insurance policy also presents some serious risks, including reduced benefits. If you do not repay the loan during your lifetime — because you die before it is paid off or you choose not to repay it — then the death benefit payable to your beneficiaries will be reduced by the loan’s outstanding principal and any accrued interest.

Also, if you borrow a significant portion of your policy’s cash value and repay it over a long period of time, there is a risk that the amount you owe will exceed the policy’s cash value. In extreme circumstances, this could cause the policy to lapse. If that happens, not only will you deprive your loved ones of their expected death benefits, but you may also find yourself with an unexpected tax liability. There are ways to minimize such risks — for example, by avoiding maxing out policy loans and having a plan for repaying any loan relatively quickly.

Handle with care

If you are faced with unexpected expenses, borrowing against a life insurance policy’s cash value can be a viable option. However, you should consult your financial advisors to make sure you understand the risks and determine whether there aren’t other, better options before doing so.

For more information, contact Jeff Green  at 312.670.7444 or [email protected] or your ORBA advisor. Visit to learn more about our Wealth Management Services.

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