If you’ve borrowed against the cash value of your life insurance, you may be wondering, should I pay off my life insurance policy loan? Especially if you’re facing a serious illness, worrying about unpaid debt may be the last thing on your mind; however, not paying back a loan against your insurance policy could significantly impact your finances and those of your family.
It’s important to first understand what a life insurance policy loan is and how it works. Policyholders who need quick access to cash—such as if they’re diagnosed with a serious illness and have mounting medical bills—may be able to apply for a loan through their insurance company that can give them access to the cash value of their plan. Not everyone is eligible, though: Such loans are only available to those with whole or universal plans, not term, and are only worth up to the amount the policy has accrued in cash value; those who haven’t been paying into their policies long enough for them to accumulate such value may not be able to secure a loan.
When it comes to the question, should I pay off my life insurance policy loan, you should learn about the particular provisions of your loan. Most insurance companies that allow policyholders to borrow against their policies’ cash value require that you pay the loan back in full before your death. During that time, the loan will accumulate interest—at a rate that may be as high as 8%—which can make the payback amount drastically increase over time.
Do Insurance Policy Loans Mandate Repayment?
Most insurance policy loans, however, don’t mandate a repayment plan or deadline—which prompts many people to wonder, should I pay off my life insurance policy loan at all? Unpaid interest can cut into your policy’s death benefit—so if you don’t at least pay the interest before you pass, the interest can reduce your death benefit significantly, which could mean you won’t be leaving your family anything, including to cover your final expenses. And, if the interest zeros out your cash value while you’re still alive, the company may choose to terminate your policy, leaving you without any coverage. Plus, both the loan and its interest will be considered taxable income, which could add to your financial concerns.
📚 Related In-Depth Guides
How can a Life Credit Living Benefit Loan Help You?
While a life insurance policy loan can be tempting to pursue when you’re in a serious financial emergency, it’s important to consider all of the options. For instance, a Life Credit Living Benefit loan allows you to borrow against the death benefit of your policy, and includes both term and whole policies. Your death benefit repays your loan, and the remaining amount goes right to your family. Explore all of the possibilities to ensure your financial future, and your family’s security, are both protected. Contact Life Credit today.