Understanding Cash Value Loans on Life Insurance

If you have a whole life insurance policy then part of your annual premium payment is applied toward your policy’s accumulating cash values. Cash values create the surrender and loan value of your life insurance contract, which means that your policy has a value beyond its death benefit, and that value can be borrowed against. Before you decide to take a loan from your life insurance policy, there are some things that you should understand.

A loan is a loan: Cash value loans are just that—loans. They do need to be paid back. If you don’t pay back the loan before death, your death benefit can be reduced by the amount of the outstanding loan balance and interest. Depending on the amount you’ve borrowed, this could have a serious impact on your beneficiaries.

Interest charges: You will be charged interest on cash value loans, but that interest is paid back to you in your cash values.

Premium loans (APL): Your cash values can be applied to premiums due if you have this feature set up through your insurance company. It is called an applied (or automatic) premium loan (APL) and while it may prevent your policy from lapsing, it is still a loan and, if not paid back, can reduce your death benefit. Don’t take for granted that your insurance company has automatically set your policy up for this process, call your agent to make sure.

Surrender value: While this post is primarily about cash value loans, it is important to clarify surrender values since they represent a different portion of your cash value reserves. Your actual cash value may not be the amount of money that you are entitled to if you decide to surrender your policy. Your surrender value represents the policyholder equity, and the amount of money you would be paid by the insurance company if you decided to surrender your policy.

Taxes: Loans from cash values are not taxable. Because they are loans to be paid back, they are not considered gains. Cash received through a cash surrender may be all (or partially) taxable.

Cash value loans, while convenient and accessible, should not be taken lightly. The decision to borrow from your life insurance policy could have an impact on your heirs if you aren’t able to pay it back before death. Additionally, if you take enough, you may wipe out any remaining balance, leaving your policy without the option for an APL if you miss a premium, which puts you in danger of lapsing. Take some time to evaluate your need for the loan and the possible consequences of taking it before you move forward. Call us if you have any questions or concerns about South Carolina Life Insurance at (864) 269-6860.