Many Canadians get life insurance to safeguard their family’s future after they’re gone. Here’s a remarkable fact: You can actually use your life insurance policy to get a loan!

A policy loan is a special kind of loan that gives you fast access to money. But, it comes with some tricky parts you should know about before considering this loan option.

Let’s dive deeper into policy loans – find out when they’re a smart money move and learn about the possible expenses that might come with them.

 

What Is A Policy Loan?

 

Policy loans allow you to borrow against your life insurance policy. They’re an option for most permanent cash-value life insurance policies.

Unlike regular loans, the funds you borrow through policy loans don’t need repayment. It’s like you’re borrowing your own money, not creating a debt but making a deduction in your plan.

However, if you don’t repay the funds you borrowed through your policy loan, that amount will be subtracted from your death benefit. This means that in the event of your passing, your beneficiaries will receive less than the original benefit if you borrowed against the policy.

Remember, a policy loan is backed by your policy’s cash value, making it a straightforward way for you to access funds.

 

How Does A Policy Loan Work?

 

Borrowing against your policy in Canada is straightforward. You can only borrow if your policy has enough cash value. The funds you get are a percentage of that cash value.

It is essential to know that these loans aren’t for term life insurance policies since they lack cash value. Plus, you’ll pay interest on what you borrow. If you miss an annual interest payment, it gets added to your loan balance.

Are you thinking about borrowing from your permanent life insurance? Check what happens to your policy value. Your insurance provider can share info on how borrowing more, keeping the loan, or repaying it affects your policy’s value.

 

How Much Can You Borrow Using A Policy Loan?

 

In Canada, there’s no fixed limit on what you can borrow from your policy. The amount depends on your insurance provider and your policy’s cash value. Typically, the highest loan you can get is about 90% of your policy’s cash value.

Remember, when you borrow against your policy, you’re not dipping into the account’s cash value. Instead, you’re borrowing from the insurance company and using your policy’s cash value as security. This way, your cash value stays the same, steadily earning interest.

 

What To Consider When Getting A Policy Loan

 

In Canada, you’ll pay interest when you borrow money from your policy. Before opting for this loan, consider how much you can expect to pay and how much interest will be charged.

 

Length Of The Loan

The longer you have an unpaid loan, the more interest piles up on the borrowed money. Eventually, the total loan balance might match your policy’s cash value. If that occurs, you lose coverage, and there’s a chance of facing taxes if your policy lapses and the loan surpasses the cash value.

Be cautious about borrowing too close to your policy’s full cash value, and try to make interest payments whenever possible. It helps steer clear of potentially expensive situations. Top of Form

 

Interest In Advance

Some insurance companies charge interest for the whole year, meaning you pay it upfront. Let’s say you get the policy mid-year; they’ll charge interest from the loan start to cover the rest of the year.

Remember, if you repay the loan within the policy year, you might not get back the interest you paid upfront.

 

Interest In Arrears

Your insurance provider might charge interest at the end of the policy year, known as interest in arrears. Interest adds up daily, starting the day you take out the policy.

If you repay the loan anytime during the year, the daily interest amount decreases. As a result, the total loan interest due at the end of the policy year also goes down.

 

How To Get A Policy Loan

Getting a policy loan is a breeze. Just fill out a form with your insurance provider, and you should have the funds in a few days.

But, if the policy recently changed hands or you’re asking for a big loan, a few extra steps might be needed. You may have to sign a confirmation document in these situations.

 

Advantages Of A Policy Loan

 

A policy loan has some advantages over a traditional loan, such as:

• You don’t need to qualify. Skip the approval process, employment checks, and income proof. No credit check is required.
• Repayment is flexible, too. There are no strict due dates, and you might not need to repay at all as long as the loan and interest don’t exceed your policy’s cash value. You can also choose when to pay the annual interest, but remember, the sooner you repay, the less interest you’ll owe.

 

Downsides Of A Policy Loan

 

Despite the benefits of policy loans, there are a few downsides to keep in mind:

• Tax issues. Regarding taxes, the money you borrow from your policy is tax-free as long as it doesn’t go beyond what you’ve paid into the policy. If your policy lapses or you surrender it, and the borrowed amount exceeds what you’ve paid, you might face taxes.
• Living more than your predicted lifespan. If you outlast the predicted lifespan after getting a policy loan, the borrowed amount hinges on the expected cash value when you pass away. The maximum loan is a percentage of the projected cash value and returns. Living beyond the estimated date might require paying off some of the loans or providing extra collateral.
• Cost concerns. The bigger the loan and the longer you keep it, the more it’ll cost you and affect your policy. Remember, you’re paying interest on the loan. If your interest rate increases or your cash value returns drop, your loan might surpass your policy’s cash value. Your lender might ask for early repayment or extra collateral to lower their risk in such cases. Keep an eye on these costs—they matter!

 

Is a Policy Loan Right For You?

 

A life insurance policy loan could be the right move in specific scenarios, such as:

You Don’t Meet Requirements for a Conventional Loan

While your credit may have been reviewed when you first got your policy, there’s no need for a credit check when applying for a policy loan. Over the years, your financial situation may change, making qualifying for a traditional loan more challenging.

To get a policy loan, simply fill out a form with your insurance provider. As long as there haven’t been significant changes to your policy and you’re asking for a reasonable loan amount, you can access your policy funds almost instantly. It’s a hassle-free process!

You Require Quick Cash

Life insurance policy funds are easily accessible, making this loan a handy option for those needing extra cash. Whether it’s fixing your home’s furnace or repairing your car post-accident, you can use the money to cover pressing expenses.

Managing Your Premiums is a Challenge

If keeping up with your premium payments is challenging, don’t let your policy lapse. Consider a policy loan to cover some premiums and keep your policy active. Take swift action to safeguard your coverage.

Alternative Loans Come With Higher Costs

Compare the interest rates of a policy loan with other loans; if the policy loan offers a significantly lower rate, you stand to save a considerable amount in interest.

Wondering whether to repay your whole life insurance loan? The beauty of a policy loan is you’re not obligated to repay it if you can’t or choose not to. However, if you leave it unpaid until you pass away, the policy’s value will decrease compared to its original worth. This means your beneficiaries will receive less than the original benefit. Plus, accumulated interest can further diminish the benefit’s value. Keep these factors in mind!

Can you take out a loan using your life insurance policy as collateral?

Absolutely, you can take a loan from your life insurance plan, but this option is available only if your policy has a permanent cash value.

Is a life insurance policy loan subject to taxation?

Typically, a life insurance policy loan isn’t taxed as long as the policy is active. But, if the loan goes beyond the policy’s cash value or if the policy lapses or is surrendered, the policy loans may become taxable. Keep your policy active to steer clear of taxes on the loan.

 

Conclusion

 

Consider a policy loan for quick funds without the hassle of a traditional loan application. Yet, be mindful of potential tax implications and other costs. Your beneficiaries could receive a reduced payout if you don’t repay the funds. Stay informed about the trade-offs!

If you want to learn more about policy loans and how to get started, don’t hesitate to contact us at PB Bankers today!