Cash values associated with permanent life insurance offer more options for policy owners. The existence of cash-values has allowed policy owners to use permanent life insurance plans as emergency funds and for countless other purposes. Borrowing from permanent life insurance is commonplace. The provision that allows this is a policy loan provision or withdrawal provision. By examining how this provision operates, one can determine whether it is advisable to borrow against your life insurance.
The policy loan provision states that a policy owner can borrow a certain percentage of the available net cash value on a permanent life insurance plan. In some cases, withdrawals are treated as loans. The policy owner is required to repay the sum withdrawn. Interest is included, depending on the structure of the plan. In this case, borrowing from your life insurance policy would not be to the policy owner’s advantage, since the policy loan and the interest would accumulate if left unattended. The terms of the life insurance contract would clearly explain the provision as it applies to the particular plan.
In several cases, insurers are generous enough to treat policy loans as interest-free withdrawals. Absolutely no penalties are levied against the policy in the event of a withdrawal. In this context, borrowing is more advantageous. It is debatable whether you should withdraw from a life insurance policy based on the policy loan provision solely. Whether you should borrow from your insurance would ultimately depend on the purpose of the insurance as well.
If you are using the cash value as an emergency fund, then your borrowing should only occur due to unforeseen, high-priority emergencies. In some cases, the cash value remains a significant component of the death benefit. It is sometimes the case that a flexible cash value plan like universal life insurance is acquired because of the increasing death benefit. Withdrawing from the plan would reduce the amount that you had intended for your beneficiary.
Borrowing from life insurance is not always a conscious decision. An automatic premium loan provision exists with permanent life insurance plans. When renewal premiums are not paid on time, the premium is deducted from the cash value and treated as a loan. Where this is treated as an interest-bearing loan, problems may arise. You may discover that your cash value is rapidly dwindling after you missed a few premiums. In the final analysis, whether you should borrow from your life insurance depends on how you intended to use the cash value originally and the friendliness of the loan provision.