Life insurance is more than just a great way to provide for your family if something happens to you; you may be able to use your life insurance policy’s cash value to finance home improvement projects while you are alive and well.

Understanding Life Insurance Loans

If your life insurance policy builds up a cash value over time, and your policy’s terms allow for life insurance loans, you may have a ready source of cash to cover home improvement costs.

Only certain types of life insurance build cash value. These include:

• Universal life insurance
• Variable life insurance
• Whole life insurance.

There are some limits to taking out a loan on your life insurance policy. First of all, building cash value takes time. If your life insurance policy is less than five years old, it probably doesn’t yet have enough value to cover your home improvement costs. Additionally, term insurance policies won’t have a cash value. You will, however, enjoy lower premiums with this type of life insurance.

When you borrow from your life insurance policy, you are actually borrowing your own money, so your credit isn’t checked. Most policies will allow you to borrow all, or almost all of your policy’s cash value. The money can be used for home improvement projects or any other purpose you desire. Remember though, in order to keep your policy in force and protect your family, you must still continue to pay your insurance premiums during the time of your loan.

Advantages of Life Insurance Loans

If you decide to take out a life insurance loan for your home improvement financing, you’ll enjoy benefits including:

• The insurance company continues to pay interest on your policy, even though you have a loan out, leaving you with a lower net interest rate.
• Not only is there no strict repayment schedule, but you aren’t required to pay the loan amount back at all.
• You don’t have to worry about being approved. You’re borrowing your own money, so you can’t be turned down.
• You’re free to spend the loaned money as you like. There are no restrictions on how this money can be used.

Disadvantages of Life Insurance Loans

Life insurance loans are not without possible risk. Here are some concerns to consider:

• As long as your loan is unpaid, you’ll be charged interest. If you don’t pay the annual interest on time, your loan will actually increase each year by the amount of the unpaid interest.
• If you die before paying back the loan, or decide you are unable to pay it back, the outstanding loan amount and any interest you owe will be deducted from your family’s death benefit.
• If you let your policy lapse or surrender it before you repay your loan and interest, this amount will be considered taxable income if it reflects a gain in the policy.
• If your whole life dividends are now applied towards your premiums, a loan may leave you with insufficient dividend funds. You’ll then have to pay your premiums out-of-pocket.