For most people, financial emergencies happen. Your water heater blows up; your transmission dies, or your roof leaks when it rains. We all know that we're supposed to have that "emergency fund" in our savings account, but sometimes everything comes at us at once.

Then you remember that insurance guy was telling you that you can borrow against your life insurance. Oh yeah! Yes, you can borrow against your life insurance because it's YOUR money.

There are, however, a few things to take into consideration.

Your Type of Policy

If you've been paying into your life insurance for at least a few years, the chances are good that there is some cash available to you, depending on the type of policy you purchased.

  • Whole Life - If you purchased a whole life policy then you will definitely have some cash available if you've owned the policy for three or more years. The key word here is "own". You must be the owner of the policy to access the cash value. If your Mom owns it and you are the insured, you'll have to get her to do it for you.
  • Universal Life (UL) - With UL or a similar version of UL, the rules are pretty much the same. If you are making minimum payments into the policy, it may take five or more years before your cash builds up to anything worth borrowing.
  • Term - If you opted for the cheap stuff, you're out of luck. Term insurance does not build cash value. Sorry.

The Next Step

Visit or call a life insurance agent and ask what your available cash value is. It's okay to let them know you want to take out a loan; it's your money, and they'll give you the advice you'll need. Your agent can check your cash value balance and also answer any questions you have about interest, repaying the loan, and how it might affect your policy. Typically, you'll be required to sign an authorization form for the insurance carrier, and your check will arrive in about seven to ten days.

The process for borrowing against your life insurance is pretty simple, as it should be. Your agent told you about this benefit, and now you're just exercising your right to borrow. There are, however, some pros and cons when borrowing against your life insurance.

Pros

·         No credit check. You're borrowing your money. No credit needed!

·         Favorable Interest - In most cases the interest on a life insurance loan is lower than the interest charged for a personal loan or a cash advance against your credit card.

·         Payback on Your Terms - Since you are lending money to yourself, you decide when and how you'll repay it, if you repay it at all. Typically, the insurance carrier will add unpaid interest to the loan balance each year. This will be shown on your annual report.

·         Your Choice Where You Spend - There are no limitations on where you spend the borrowed funds. You can buy a new water heater for your home or go to Vegas. It's completely up to you.

Cons

·         The death benefit of your life insurance will be reduced by the amount of any outstanding loans until the loan and interest are repaid.

·         If you elect not to pay the interest when due, the amount will be added to the balance of your outstanding loan.

·         For policies that pay dividends, your dividend amount will be reduced because of the outstanding balance of your loan.

·         Policy Lapse - If your policy is a Universal Life Policy, the interest that is credited to your account is based on the cash value of the policy. The lower the cash value in your policy, the lower amount of interest will be credited. Since Universal Life Policies rely on interest to keep them in-force in the later years, it is possible that your policy may lapse if the interest credits are significantly reduced.

When you purchased your life insurance, your agent probably told you about cash value and how you can access it during your lifetime. If that time has come, contact Skyline Risk Management, Inc. by calling (718) 267-6600 to get the information you need to make an informed decision.