Life Insurance Loans

IF YOU HAVE a permanent life insurance policy and you’ve built up some cash value, you could potentially borrow against the cash value. The loans are easy to obtain, with no credit check required, because you’re effectively borrowing from yourself.

Still, tread carefully. In theory, you don’t have to repay life insurance loans. But any loan outstanding at the time of your death will reduce the policy’s death benefit. Even if you don’t repay the loan itself, think twice before skipping the interest payments. If you don’t make the interest payments, those will get added to the loan balance—and you’ll incur interest charges not only on the original sum borrowed, but also on any unpaid interest.

If the outstanding loan grows too large, so that the amount owed is greater than the policy’s cash value, your policy could lapse, triggering a hefty tax bill. You would typically owe income taxes on the policy’s cash surrender value, less the total premiums paid into the policy. That income tax bill would be avoided if you kept the policy until you died.

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