Borrowing Against Life Insurance
Reader Question: 
Does borrowing against my Life Insurance Policy reduce its value? I need some funds to cover an unexpected expense, but do not want to affect my policy’s value.
Thanks, Ritchie
Thanks for your question, Richie. It will not if the loan is repaid. Whole life, universal life and variable life insurance policies unlike term life insurance have a savings component which is also known as “cash value”. Policy holders may withdraw or borrow against the cash surrender value of their policies. A heads up however, if you withdraw from your policy even if it is just to the basis you may be obliged to pay surrender charges, and withdrawn earnings over the basis are liable for income tax.
Taking a policy loan using the cash value as collateral is one way to avoid surrender charges and still be able to access the money. As long as you repay the loan, the amount is not considered taxable income. You will have to pay interest on the loan which is not tax deductible.
If you have any outstanding loans against a Life Insurance Policy collateralized with the cash value of the policy, your death benefit is reduced to cover the loans. It will reduce the cash surrender value of the policy to have a loan as well should the policy be canceled before you pass.
If a policyholder loan is not repaid by the policyholder while he/she is alive, it will be taken from the distributed proceeds to the survivors and beneficiaries. Good luck with your financial situation. Be sure to consult with your insurance agent to review the specifics of your policy if you have any further questions.
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