How does borrowing against a whole life insurance policy work?

Question

How does borrowing against a whole life insurance policy work?

Answer 1

You pay into the insurance policy.  After a few years, a small amount of what you've paid in, approx 10%, is available for you to "borrow back".  You pay interest to the insurance company.  If you die, they subtract the unpaid balance from the payout.

You can't buy a $1,000,000 policy and borrow $1,000,000 off of it.  If you pay $1,000 a year, after five years, you have about $500 you can borrow.  

It's NOT a savings or investment or retirement plan.  If someone is selling you whole life, as a "wealth building" mechanism, RUN AWAY.

It would be like me, saying, ok, give me $1,000, and I'll lend you $100 of it, and you pay me the interest.

Answer 2

When you pay your premiums, a portion of your premium goes to the insurance and some into the cash value. During the first 2 years on the policy, no cash value is accumulated. After that, it starts to accumulate with a guaranteed annual interest rate of anywhere between 1-3%.

In a whole life policy, there's a page that shows what your cash value will be and how much surrender charges will be applied if you surrender the policy. What's ever left over is the amount you can borrow. So lets say that in 5 years your cash value is worth $4000 and the surrender charge is $3000. So you can take a loan of $1000 and keep the life insurance or cancel the life insurance and get the $1000 check. When you borrow the cash value, the company will charge you a monthly interest rate until you pay it all back.

Personally, I think its better off to save your money somewhere else so that you can take money out anytime without having to put it back. If you want life insurance, stick with term insurance. Term insurance has no cash value.

Answer 3

You call the insurance company and borrow usually about 90% of the cash value.  If you just pay the interest due each year the loan won't grow and it will get paid back upon death.

But, you're only borrowing against a percentage of the cash value that you've accumulated which will be minimal as a whole life policy yields maybe 2-3% over time.

Buy whole life insurance (or a better version of coverage that can last your entire life) if you need insurance for that long.