The Standout Firm For

Insurance, Malpractice
And Business Litigation

In California

Can you borrow against your life insurance policy?

On Behalf of | Sep 25, 2020 | Insurance Law

If you have a life insurance policy in California, you are likely paying some pretty high premiums. Even though your beneficiaries will be more secure in the long run in the event of your untimely demise, you may be seeing much of the benefit. 

There is, however, another advantage to a certain type of life insurance policy that directly benefits you. According to Investopedia, if you have what is known as a whole life insurance policy, you have the option to borrow against it should you find yourself in need of some extra cash. 

How borrowing from your policy works

When you borrow money from your life insurance policy, it works like any loan. You will need to pay back the balance over time, and you will be assessed interest until the borrowed amount is paid out in full. One advantage of a policy loan is that it is not considered income, and will therefore not be taxed by the IRS. 

When you can borrow the money

You do not get immediate access to this option when you purchase a policy. What happens is that over time, as you make your payments, you accumulate tax-free cash value. This cash value functions as a savings account that is separate from your death benefit and face value. 

The more payments you make, the more your benefits increase. This is because once your payments exceed what is needed for the death benefit, the insurance company begins investing your money in a cash value savings account. At this point, the option to borrow against the cash value becomes available.