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Does it hurt your credit score?
Does it lower your death benefit? For how long? (I’m only 27, so not too concerned about that part. Maybe I should be, lol.)
Do you report it on your taxes?
How long does it take to pay off, and does it raise your premium until it’s paid off?

Please put your answer in “dummy-speak,” as I am a writer, not a financial analyst . . .

Thanks all!

4 Thoughts on What are the financial implications of borrowing against your life insurance?
  1. Reply
    August 19, 2011 at 6:56 am

    It has nothing to do with your credit score. Any death benefit payment will be reduced by the amount you still owe on the loan. Only whole life policies have any cash value against which you can borrow. There is no such option with term insurance.

  2. Reply
    August 19, 2011 at 7:19 am

    You can only borrow up to a small portion of what you’ve paid into it, so it’s actually your own money, that you’re borrowing back.

    Yes, it lowers your death benefit, until you pay it back.

    You don’t report it on taxes, because it’s your own money, that you paid in.

    You don’t HAVE to pay it off at all, ever. But if you don’t, with interest, your policy will cancel out.

    See, if you buy $ 1,000,000 life insurance, maybe it’s costing you $ 3,000 a year. $ 300 of that money that you pay for the insurance, goes to ‘cash value’. You can borrow usually 80% of the cash value. Once you have the policy 10 years, and you’ve paid in $ 30,000, you probably have $ 3,000 of “cash value” you can borrow. You NEVER have to pay it back, but if you die with it unpaid, they subtract that amount from your payout. And, they subtract 8% interest on that money – which the insurance company keeps per year – from the cash value as you keep paying in your premiums each year.

    When you stop paying the premiums, and have no cash value left, the policy cancels.

    *numbers are rounded to make easy examples because my brain is tired.*

  3. Reply
    Lauren F
    August 19, 2011 at 7:53 am

    If it is term life insurance, you can’t borrow against it. If it is whole life insurance, you can borrow up to a certain amount of cash value, but they will charge you interest on the amount borrowed (about 8% – 10% depending on the policy). And, if you don’t make any payments on it, the interest due will be paid by another “borrow” on the loan, which then itself has interest charged. If you do this long enough in theory you could wipe out all of the death benefit on your policy.

    If you die with a loan outstanding,the loan plus all unpaid interest will be taken off the top before your heirs get anything. So, yes, it cuts into the death benefit.

    It doesn’t hurt your credit score.

    It’s not a bad way to borrow for a short term emergency, but it can be expensive as the interest rate is higher than what you might pay, and if you don’t have the discipline to pay it back, the interest eats away for a long time.

  4. Reply
    August 19, 2011 at 8:04 am

    Everyone here is WRONG in one way or another…here are some CORRECT answers…

    -Has nothing to do with credit

    -You actually ask the question correctly “borrow AGAINST your life insurance” This doesn’t mean you’re borrowing your own money. It means that you can get a loan using your policy’s cash value as COLLATERAL. The cash value is an asset (can be listed as such on loans/mortgage applications etc.) The cash value builds up and can be used in this situation as a living benefit. In other words, you don’t need to die to get access to the money.

    -The only time you need to report it on your taxes is if you lapse the policy and have taken out more than you put in. Contrary to what our resident “Top ‘incorrect’ Contributor” says, it’s certainly possible to have a lot more in your cash value than what you put in over time. She’s just plain WRONG, as are many others on here.

    -It takes as long as you want it to. You don’t need to pay it off, but if you pay nothing and took a large chunk of cash value out, depending on the type of policy it is, you could lapse out the policy. However, most insurers want you to continue on with the policy and will advise you on how to avoid this.

    Any other questions, feel free to contact me directly.

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