Can you borrow against your life insurance policy?
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Asked April 27, 2011
That depends on what type of life insurance policy you have, and how that policy is set up. Term life insurance does not usually allow the policyholder to borrow against the accrued value of the policy, but other types of life insurance do. The reason for this is that term life insurance is organized differently than whole, variable or universal life insurance and does not include provisions for the policyholder to directly access the funds. Term life pays a guaranteed amount on the death of the policyholder, but it does not include the ability to earn additional money or other variations necessary for borrowing against the account to be a realistic option.
Most types of whole life, including universal life and variable life, allow the policyholder to participate in the policy more directly. This could mean choosing where the premiums you pay are invested, manipulating the premiums and payout values as you go, or making tax-deferred loans to yourself out fo the funds you have paid into the policy. One of the most appealing aspects of a whole life policy is the ability to borrow against the current value of the policy if you must.
It should be noted, however, that life insurance policies are not intended to be investment tools, no matter how much the idea may be appealing. To illustrate why, consider that you borrow against the policy today and are involved in a fatal incident tomorrow. The amount of the policy will be reduced by the amount of money you have borrowed from the policy, and that could result in the policy being worthless for the purpose it was originally meant for. Borrow from a life insurance policy if you must, but try to avoid making surreptitious loans for things like a vacation or other non-essential uses. You should never use a life insurance policy to fund an uncertain enterprise, such as a trip to Las Vegas, even if you think you will be able to recoup the money immediately.
Answered April 27, 2011 by Anonymous