Skip to main content

How a Loan Affects Your Whole Life Insurance Policy

By June 4, 2015 June 9th, 2020 No Comments

Coming up short on monthly expenses happens to many people, at least on occasion. When this happens, most people borrow money, while others may make a sacrifice instead. For people who have whole or universal life insurance policies, they have the luxury of getting a loan from their insurance, without having to meet qualifications.

Although getting a loan from your insurance is convenient, it helps to understand how loans affect the status of your life insurance policy. Understanding how a loan against the cash value of a life insurance policy helps you plan appropriately so that you are not negatively impacting your death benefit.

How a Loan Against Your Life Insurance Policy Works

The process of getting a loan is quite simple. As long as the policy owner has cash value available, they can get a loan against their policy. The most appealing aspect of getting a loan from a life insurance policy is that you don’t have to repay the loan. In general, the loan reduces your death benefit. 

Even though you don’t have to make payments on your loan to pay down the amount you borrowed, are responsible for paying the interest on the loan. If you don’t pay your interest, then you jeopardize your beneficiaries’ death benefit.

Pay Your Interest Back to Avoid the IRS

Getting a loan from your life insurance policy often means you don’t have to pay it back, but it is always a good idea to make the payments. Just like any other loan, when you take out a loan on your cash value, interest accrues. If you choose not to pay the interest on your loan, then it will decrease your death benefit. Additionally, if the interest exceeds the death benefit, the IRS treats the interest as if it is income, and you will receive a tax notice. Paying the interest helps you avoid the financial complications associated with receiving a loan from your life insurance policy.

Receiving a loan against the cash value of your life insurance policy allows many people to meet their monthly obligations. However, if you are not diligent about paying your interest back, you could lose your death benefit and receive a tax notice from the IRS about the accruing interest.

Get  Life Insurance QuoteLearn more about how your coverage can benefit your family. Call Loftis & Wetzel Corporation at (855) 360-0466 for more information on Oklahoma City life insurance.