The most common challenges that seniors face aside from medical issues are financial difficulties. Millions of seniors are plagued by financial problems that seem to have no solution. The search for solvency has led many seniors to explore the possibility of borrowing money against their life insurance policies. In this article, we will explore the mechanics of how to borrow against a life insurance policy. Keep in mind, you can only borrow against a permanent or whole life insurance policy. You will also learn more about whether borrowing money against your life insurance policy may be right for you.
Why do seniors borrow against their life insurance policies?
There are dozens if not hundreds of reasons why a senior citizen would choose to borrow money against their life insurance policies. Being retired isn’t always easy. Unless you have saved up enough over the years or did well in the stock market, you will find yourself stretching every last dollar as far as you can.
Many seniors end up borrowing money against their policies to pay for long-term care services or cover the expenses of living in a nursing home. Others borrow against their policies to help their grandchildren pay for college or buy their first home. Regardless of your reasons, if you need access to money, borrowing against your life insurance policy is one way to go. That said, it’s only one option out of many. Never sign anything until you have explored all of your options.
How to borrow money against your life insurance policy.
According to Investopedia.com, “Policy loans are borrowed against the death benefit, and the insurance company uses the policy as collateral for the loan. Life insurance companies add interest to the balance, which accrues whether the loan is paid monthly or not.”
A whole life policy is a more expensive type of life insurance, and it has no expiration date, meaning the term lasts the lifetime of the insured. The premiums are typically higher and the money paid into the life policy that exceeds what is needed for the death benefit is invested by the life insurance company which then creates a cash value after a few years.
This type of policy has two values: the face value or death benefit, and the cash value that acts as a savings account. Once the money invested increases the amount of the death benefit, the tax-free cash value can then be borrowed. The policy loan is not taken out of your death benefit but in the event you let your policy lapse, taxes must be paid on the cash value and the insurance company uses your policy as collateral for the loan.
There is no underwriting process involved when borrowing money against your life insurance policy. Compared to borrowing money from a bank or even a credit union, it’s much easier as you are essentially borrowing money from yourself. When you borrow money from a bank, you have to fill out a seemingly endless amount of forms and the bank will then process your application and run a credit check on you. If you do decide to borrow money against your life insurance policy, contact your insurance company to discuss the amount of money available you can borrow.
Will you regret borrowing against your life insurance policy?
Now that you know just how easy it is to borrow money against your permanent or whole life insurance policy, you’re probably thinking it sounds too good to be true. So, is it? Will you regret borrowing against your policy? Unfortunately, the answer for many seniors that have borrowed against their life insurance policies is yes and no!
As it turns out, there are some advantages and disadvantages to borrowing money against a life insurance policy. A key benefit is that money received from a loan is not considered income. Another advantage is that the insurance company credits the amount borrowed at the same rate as the remainder of the cash value in your policy. This allows your premiums to remain stable as long as you pay the interest on the borrowed funds.
A disadvantage of a policy loan is your beneficiaries will receive less money than you intended to give them unless the loan is repaid. Why? Because the loan amount and accrued or unpaid interest are deducted from the death benefit unless repaid before death. Another key disadvantage of a policy loan is that you can no longer surrender your policy or let it lapse. If you do, the loan amount becomes income to you, creating a potentially significant tax issue.
What are the alternatives?
Since borrowing against your life insurance policy may not be such a great option for everyone, after all, you’re probably wondering what alternatives do you have? If you need access to a significant amount of money quickly, borrowing against your life insurance policy isn’t your only option. You could always get a reverse mortgage instead, but then you would the equity in your home. Another option would be to sell any collectibles you may own. Of course, parting with sentimental items is never easy.
A better alternative to any of these options may be to sell your life insurance policy in a life settlement transaction instead. Selling a life insurance policy has more advantages than borrowing against your policy, with fewer potential drawbacks.
Why a life settlement is a savvier option than borrowing against your policy.
So why may it be better to sell your life insurance policy rather than borrowing money against it? For one, when selling your life insurance policy, you not only avoid paying back the principal and interest, but you eliminate your premiums going forward. Although borrowing money from your policy may be easier than getting a loan from a bank, you are still borrowing money. If you never pay that money back, the insurance company will recover it by simply reducing the amount of your death benefit. A lower death benefit means less money for your beneficiaries. By selling your life insurance policy, you have nothing to lose. After the transaction is complete, you will have a lump sum payment to spend however you want.
After using part of the money from your life settlement to pay bills, debts, or cover medical costs, you can use the rest to do something nice for yourself or give it to your beneficiaries. It could be as simple as buying a new car or as extravagant as moving to another country to retire in luxury. Read more about Policy loans, reverse mortgages and life settlements.
Get in touch with MRE Finance!
Now that you have discovered the advantages that a life settlement may offer and knowing what your options are, you have a team of experts at MRE Finance that can help you sell your life insurance policy for cash. Start your journey to financial freedom today.
Want to find out what your policy could be worth to sell? Try our Free Life Settlement Calculator and receive an estimated value of your life policy in minutes. If you prefer to speak with one of our specialists, give us a call at 1-800-521-0770.