To get to the buzz, how soon can i borrow from my life insurance policy? One can normally borrow against a life insurance policy once sufficient cash value has been accumulated, which would take a few years.
This timeframe would depend upon the nature of the policy, premium payments, and so forth. Some whole life policies, for example, might allow 2-3 years from now, while others, like universal life, might be longer.
You can’t borrow against a life insurance policy unless it has a cash value component. This is the savings built-up portion of the policy.
How does The Life Insurance Policy Timeframe Work?
Permanent life insurance policies alone (whole and universal life) build up cash value against which you can borrow. Term life policies don’t have cash value, so borrowing isn’t possible. Several factors decide when you can borrow:
1. Premium Payments
More premiums result in a quicker buildup of cash value.
2. Policy Design
Certain policies are set up to accumulate more cash value in less time than others.
3. Investment Performance (for universal life)
Universal life policies with a variable rate of interest can experience more volatile cash value growth.
How Long are the Typical Waiting Periods?
While it varies, you typically can borrow against a whole life policy within a few years, typically 2-3 years, depending on premium payments and policy format.
You typically can borrow up to a given percentage of the cash value, typically 90%, from Paradigm Life. Now, the life insurance policy loans will accrue interest and may include associated fees.
If you have outstanding loans at the time of your death, the death benefit to your beneficiaries will be reduced by the loan amount.
What Type of Life Insurance can You Borrow from Immediately?
Only life insurance policies that possess a cash value can be utilized in a life insurance loan. These types of policies are popularly known as permanent policies, meaning they are meant to last one’s lifetime.
The two major types of permanent life insurance are ‘universal’ and ‘whole.’ Most advisors would advise waiting for at least 10 to 15 years before cashing out your entire life insurance policy.
The policy has to be large enough so that you can withdraw from it without affecting your coverage. Even after waiting for many years, cashing out the policy is not always advisable.
How Long do you need to Wait to Take Money Out of Life Insurance?
Generally, most advisors usually wait for at least 10 to 15 years before cashing out the whole life insurance policy.
The policy must first grow to a certain point for you to draw from it without creating problems for your coverage. Even if you’ve waited for several years, cashing out the policy is not always a good idea.
If you have permanent life insurance, you can likely borrow against the cash value of your policy to get a loan. You can borrow money from your life insurance company at any time, and there is no loan approval process.
What if You Don’t Pay Back a Life Insurance Loan?
If you do not pay back a life insurance loan, the borrowed amount (plus interest earned) will be deducted from the death benefit if you die.
Your beneficiaries will receive less than the policy face value. So, if the amount due plus interest on the loan is greater than the policy’s cash value, it can lead to the policy’s lapse, leaving you unprotected.
The loan balance and interest not paid will be deducted from the death payment to your beneficiaries. If the loan balance plus interest increases to the point that it surpasses the cash value, the insurance provider may lapse the policy, and you’ll no longer have coverage.
If the policy lapses or if the loan is not repaid, there may be tax implications, potentially requiring you or your beneficiaries to pay income taxes on the borrowed amount, according to Guardian Life.
While you’re not legally obligated to repay the loan immediately, it’s generally in your best interest to do so, according to Guardian Life.
As with any loan, interest is charged on a life insurance policy loan. If you don’t repay the interest, it will be rolled over into the loan amount, and thus more will be owed.
How Soon can You Borrow Money After Purchasing Life Insurance?
You normally borrow against a life insurance policy once the cash value is sufficient, normally 2-10 years, or even several years, depending on the type of policy and premium paid.
But then, some policies, particularly the ones that have higher growth levels in the cash value, can be borrowed against sooner, even during the initial years.
Borrowing against an insurance policy is only feasible after a cash value component has accumulated. That cash value is an amount of the premiums that have been paid, which accumulates over time, similar to a savings account.
Various kinds of life insurance policies, such as whole and universal life, build up cash value differently. Whole life policies tend to have slower cash value increases, whereas universal life policies can provide quicker growth and more premium payment flexibility with the ability to borrow sooner.
More to Loan Policies Despite Life Insurance
Insurance companies sometimes impose a minimum cash value for a policy prior to acquiring a policy loan. The minimum varies from one insurer to another and even from one policy to another.
The amount you can borrow is usually a percentage of the cash value, usually about 80-90%. Policy loans are normally interest-based, usually lower than banks or credit unions.
It must be mentioned that policy loans can lower the death benefit in the event that the loan and interest are not repaid before death.
While it generally takes several years before sufficient cash value can be borrowed against, some policies, especially those with single premiums or high cash value growth, may provide borrowing much sooner.
Final Words
You can usually borrow against a life insurance policy after the cash value is large enough, usually after a few years, between 2 and 10 years, depending on the policy and the premium payments.
Some policies, especially those with more rapid cash value increase, can allow lending earlier, even in the initial years.
Lending against a life insurance policy is only possible once a cash value component has accumulated. This cash value is part of the premiums paid and accumulates over time, similar to a savings account.
Insurance companies generally have a minimum cash value that must be obtained before taking out a policy loan. This may also vary depending on the company and the policy. You generally borrow a percentage of the cash value, maybe in the 80-90% range.
Policy loans generally have interest charges, which generally are less than banks or credit unions charge. Importantly, it must be remembered that policy loans can reduce the death benefit when the loan and the interest it accrues are not paid off before death.
While cash value will typically take a few years to accumulate adequately for borrowing against, some policies, especially single premium or rapid cash value building policies, allow for borrowing much sooner.
