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How To Borrow From Your Life Insurance Policy

By Jason Markum

I don’t know anybody that likes to pay insurance premiums, I know I sure don’t! But the fact of the matter is, insurance is an important part of our lives they it’s very hard to get around. That’s how the American capitalistic system was set up. You see we have freedom in this country, in fact that’s what the country was founded on. The problem with freedom is that it allows people to make stupid choices because they are free to do so!

One way that we have come up with as a society to mitigate the stupidity of the choices that our free citizens make, is by issuing insurance. And that’s really all comes down to. That’s the trade-off we pay for freedom… we have to make the insurance payments every month!

But there is a little bit of a silver lining, and there is a way for you to take advantage of your life insurance policy and take a little money out of it now and then in the case of a loan.

Here in America we’ve gone through one of the worst recessions in our history… in fact we are still going through it. I’m talking about, of course, the great recession of 2008 to 2010. This is been a special recession in that the financial system has been hit hardest. What that means for everyday people is that it is much harder to get loans.

In such an environment where the banks aren’t lending as much money as they used to, tapping into your life insurance policy for quick loan may be one of your only options at the moment. Here’s what you need to know.

If your policy is more than 10 years old, you may be able to borrow money from it at incredibly low rates… as low as 5% or sometimes 6%. Many policies that are less than 10 years old have provisions in them that state you have to pay at least 8% in interest or maybe even a variable interest rate. If your life insurance policy requires that you pay a variable interest rate, then chances are that variable interest rate will be tagged to some standard that’s posted in the newspapers everyday. Check the exact language of your policy to find out for sure.

Usually speaking, you won’t be able to deduct the interest that you pay on your loan for tax purposes. But one good thing about it is that you don’t have to get your loan approved by any sort of bank officer in order to qualify for your loan.

And I should point out, and maybe I should have said this from the beginning, that you can only borrow from a whole life insurance policy, not a term life insurance policy because they have no cash value. And you can generally only borrow as much money from your whole life insurance policy as you have paid in so far.

So if you’ve paid in $20,000 over the years, you cannot borrow more than $20,000 from your policy. And there may be other tax consequences that you’re not aware of that will be triggered once you borrow from your policy. Be sure to check with your accountant first and it might be a good idea to check with your insurance agent as well because they can give you more information on the mechanics of how to borrow from your policy.

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