Whole life insurance isn’t just for death. As the name suggests, it also has benefits that can last your whole life. One such benefit is borrowing against cash value, a powerful strategy to maximize your policy. More specifically, you can borrow against the equity of your insurance policy, also called the Cash Value. The Cash Value portion of your policy is entirely liquid, accessible, and a great savings pool. After all, every time you pay a premium, your “equity” in the policy grows. The Cash Value also earns interest and dividends.
We often recommend borrowing against cash value via a policy loan because it allows you to access your money without a withdrawal. While you do pay interest on the loan, your account also continues to earn interest and dividends on the full amount—helping you maintain the power of compound growth.
Advantages of Borrowing Against Cash Value
- It’s Straightforward and Fast There’s no qualification process to take a policy loan when you’re borrowing against cash value. All you have to do is request the money from your insurance company. As long as you have the requested amount available in your policy, you can access a loan without an application, credit check, or high fees. It’s one of the simplest ways to get access to cash, and you can often have the money in 5-10 days.
- It’s Flexible When borrowing against cash value, you can borrow up to 95% of your available cash value with most mutual insurance companies. The repayment schedule is entirely flexible, allowing you to design it to your needs. This makes policy loans much more adaptable than traditional loans, giving you breathing room if needed.
- It’s Affordable Loan rates for a life insurance loan typically range between 4-8%. While this might seem high, you are also earning an internal rate of return on your cash value, likely around 3-5%. Since borrowing against cash value allows your account to continue earning interest and dividends, it offsets some of the loan interest.
- It’s Not Taxable (Usually) A policy loan is not considered taxable income by the IRS, as long as your policy stays in force. This allows borrowing against cash value without the tax burden, unlike other financial assets that may trigger taxable events.
Disadvantages of Borrowing Against Cash Value
- Reduced Assets Available When you borrow against your cash value, that specific amount of capital is no longer available until you repay the loan. It works similarly to any line of credit—you regain access to your cash value as you make payments on the loan, minus the interest.
- Impact on Heirs If you pass away while your cash value is leveraged, that amount will be deducted from your death benefit. To mitigate this, you can fund paid-up additions (PUAs) to boost your cash value and your death benefit simultaneously.
- Potential Taxes In certain scenarios, borrowing against cash value can create a taxable event if not managed correctly. For example, if you fail to repay your loan and owe more than you’ve paid in premiums, it could be considered taxable income.
- Emergency Fund Implications Your cash value often serves as your policy’s emergency fund. If you’re struggling to pay your premiums or repay your loans, it could jeopardize your policy and lead to its collapse. This is why responsible borrowing and repayment are crucial.
Should You Borrow Against Your Cash Value?
Borrowing against cash value can be a fantastic tool if you need quick access to funds and want to maintain the benefits of whole life insurance. However, it’s essential to be thoughtful about repayment and ensure you’re not putting your financial security at risk. When in doubt, consult with your financial advisor to determine the best approach for your specific needs. Whole life insurance gives you the flexibility to make the best choice for your financial situation.