Life Insurance Loans of May 2023

What is a life insurance loan?

A life insurance loan is a loan against a permanent life insurance policy. Whole life insurance allows the policyholder to have the amount of death benefit that the relatives of the policyholder will receive in the event of their death and cash value against which it is possible to take a loan. Part of premium payments goes to the death benefit, and the other part goes to the cash value. If the policyholder has accumulated sufficient cash value to take out a loan, then when contacting the insurance company, this cash value becomes collateral. If the borrower has problems paying the loan, then the amount that the borrower took from the insurance company deducts from the death benefit and takes it away.

Pros and cons of life insurance loans

Pros

• The straightforward process of obtaining a loan. Since a life insurance loan is a collateral loan that is guaranteed by the borrower's assets, obtaining a loan is simplified. Usually, lenders don't make a credit check and don't check the borrower's income level. To get such a loan, the borrower only needs to have a cash value slightly higher than a certain threshold. Some online lenders have even automated this process, so the borrower doesn't need to wait for the approval.

• Life insurance loans will cost the borrower cheaper than other loans. A life insurance policy loan is a secured loan, so the interest rate for such a loan is lower. The high-interest rate in other loans is most often associated with the high risk that the lender has by issuing a loan to the borrower without collateral. Here, the borrower's insolvency is guaranteed by valuable collateral, so such a loan has less risk for the lender. Usually, life insurance policy loans have not too large fees and closing costs. Also, such loans are usually not subject to additional taxes.

• Funds can be used. The borrower can use the received loan balance from the life insurance policy loan as they want. Where the borrower spends the funds received is not important for the lender, since the loan is guaranteed by a cash value component, valuable collateral. The borrower can spend the funds received on home repairs, vacations, or emergency expenses.

• Flexible loan repayment period. Unlike a traditional loan in which the borrower pays equal monthly payments, a life insurance policy loan doesn't have a clear loan repayment schedule. The borrower can pay the entire loan amount within two months or may pay nothing for several years. The borrower doesn't have a deadline for the payment of this loan. The borrower needs to remember that if there is an outstanding loan after the borrower's death, the loan amount plus the accumulated interest will be deducted from their death benefit.

Cons

• The longer the borrower doesn't pay the loan, the more interest accumulates. If the borrower takes too long to pay off the loan, then by the time they want to pay it, a large amount of interest may accumulate. Interest accrues throughout the entire time, from the moment of taking out the loan until its full repayment. It is more profitable for the borrower to pay off the loan as soon as possible since a quick repayment of the loan will ensure less overpayment on interest.

• Risk of loss of insurance policy and death benefit. The most important drawback of any secured loan is the risk of losing what plays the role of collateral. Here, it can be life insurance cash value or death benefit. If the borrower cannot repay the loan, the amount that the life insurance company issued to them is withdrawn from the policy's death benefit. The beneficiaries of the borrower at their death either receive a much smaller amount than they should according to the terms of whole life insurance or don't receive any compensation at all.

• If the borrower's debt exceeds the cash value, taxes will be added to the amount of debt. Policy lapses if the accumulated loan interest, besides the loan balance, exceeds the borrower's death benefit. With policy lapse, the entire principal amount and the interest amount will be considered income by the IRS and will be taxed. If the borrower delays paying off the loan too much, this loan may come out much more expensive than expected. Therefore, before borrowing money, the borrower needs to responsibly approach the loan repayment plan.

Why you need a life insurance loan

Life insurance policy loans may be suitable for borrowers who can not be qualified for another loan. This may be due to poor credit or insufficient income. The borrower may urgently need funds to pay medical bills or other emergency expenses. Here, if the borrower has a life insurance policy, then a life insurance loan may be the only option to get immediate funds without a credit check and income level verification.

There may also be situations in which the borrower cannot pay premiums under the life insurance policy. Whole life insurance requires payments to maintain insurance. If the borrower cannot make the insurance payment, then it lapses. In such situations, in order not to lose the life insurance policy, the borrower can borrow money against the cash value and on-time make premiums paid on.

Any traditional loan usually has a higher interest rate than a loan against cash value life insurance. For some borrowers, a smaller overpayment on interest may be a good reason to consider this loan as the only profitable financing option.

How to choose a life insurance lender

When choosing a suitable loan offer and a suitable lender, the borrower should consider several important factors.

The most important factor to consider when choosing a life insurance loan is the interest rate. Most lenders that issue life insurance policy loans offer interest rates lower than any personal loan, but all lenders offer different interest rates. This is especially important to consider for a borrower who plans to pay off the loan for a long time, since interest accumulates until the loan is fully repaid. Landers can offer fixed rates and variable rates. Variable interest rates can allow the borrower to have an annual interest rate below the initial one. If the borrower values stability and doesn't want to have the risk of increasing interest rates, then they should choose a fixed-rate loan.

The borrower should also consider what additional fees the lender requires. These fees can be application fees, closing costs, and others. The size of the fee data will eventually affect the total amount of debt and the borrower should look for a lender who either has small fees or doesn't have them at all.

Another important aspect for the borrower to consider is the loan-to-value ratio. The Loan-to-value (LTV) ratio determines what percentage of the cash value amount the borrower can borrow. The best life insurance loan lenders have a loan-to-value (LTV) ratio of 90% to 95%.

To choose the right lender, the borrower can contact the financial advisor who will offer assistance in choosing the best loan solution.

Legal regulations of life insurance loans

Life insurance policy loans, like other secured personal loans, are regulated by the Consumer Financial Protection Bureau (CFPB). This state organization regulates and controls the activities of banks, credit unions, and other financial institutions. The main goal of the organization is to ensure that financial institutions, including those that issue loans, don't violate financial laws and conduct only honest activities without fraud and deception. If the borrower has any complaint regarding financing, credit cards, mortgages, or personal loans, the CFPB helps to deliver the complaint to the company and get a response to it. The CFPB ensures that every financial institution treats all borrowers equally and suppresses any discrimination on any grounds.

The National Association of Insurance Commissioners (NAIC) recently enacted Actuarial Guideline 49, which includes an interest rates control point for cash value life insurance policy loans. According to this legal act, the maximum interest rate that can be set for this loan should not exceed 7%.

Applying for a life insurance loan

A loan against cash value life insurance has the simplest requirements and obtaining among all personal loans.

Some borrowers receive life insurance policy loans directly from their own life insurance companies, so obtaining a loan becomes even easier. Such a loan has no requirements for the credit score and the borrower's income level, therefore, a potential borrower doesn't need to prepare documents confirming income and doesn't need to provide his SSN or ITIN. Also, the borrower's eligibility doesn't depend on the state of health.

As with any personal loan, a potential borrower must: 

• Be at least 18 years old

• A citizen or permanent resident of the United States

• Upload identity documents such as a driver's license, passport, or state-issued ID.

Sometimes, the borrower may also need to notarize the existence of a life insurance policy. This may be required if the insurance policy has recently changed ownership, the loan exceeds a certain amount, most often $50,000, or if some personal information in the insurance has been changed in the last month.

To apply for such a loan online, the borrower needs to go to the lender's website and click on the "Apply Now" or "Get Started" button. Next, they need to enter personal information such as name, phone number, email, age, residential address, state, and ZIP code. After that, the potential borrower needs to enter the amount of benefit payout, a health condition that can be healthy, average, minor, or terminal. They also need to choose which type of life insurance policy they have. Most lenders have an automatic application verification process, so approval should come almost instantly.