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What You Should Know About Borrowing from Your Life Insurance Policy

Did life change your plans? Maybe you want to retire before 59 ½ with supplemental income, fund an education or put a down payment on a home? You may be able to use your fixed indexed universal life insurance policy (FIUL) to help with any unexpected life events.

In an appropriately funded FIUL, over time there’s an opportunity to build something called cash value, or surrender value. The cash value grows on a tax-deferred basis and gives you the power to access your money when you need it.

It’s important to know that the cash value helps support the death benefit in the policy, so always work with your agent to determine an appropriate amount to take out.

Work with a financial professional

The most important thing you can do when considering borrowing money from your life insurance policy is to work with a licensed agent. They can help you review your policy and discuss your needs. They will likely work with you to have the company provide an analysis of how much you can borrow and what it means for your specific policy.

This will help you have an understanding of how much you can borrow and how your needs can be met now and in the future.

Know how taxes impact what you borrow

It’s also important to understand the tax implications of borrowing from your policy’s cash value. In an appropriately structured FIUL, the FIUL is funded with after-tax money and growth is tax-deferred. You can access your money via policy loans without creating a taxable event in most situations. The accumulation in your policy could mean more to you down the road, since very few financial vehicles allow the same tax protection that an FIUL does.

Always consult your financial professional or tax advisor to understand how taxes affect your individual policy.

Understand what you need to pay back and what you don’t

There are different types of loans. F&G products are designed to allow payments back on the loan — but you’re not mandated to do so. Charges are associated with the loan to potentially build up against the benefit on the policy, but some types of loans allow you to potentially continue to earn interest on your borrowed money.

Most policies are designed to not repay the loan, and they’re able to do so in the long run. The most popular loan type typically does not get repaid. The loan balance would simply be deducted from the death benefit when that’s paid out.

Talk to your insurance agent to see if taking a loan against your FIUL is right for you.

Want to learn more about FIULs? Check out “What is Fixed Indexed Universal Life Insurance?

Surrenders, withdrawals and loans will reduce available death benefit and may be subject to surrender charges. Surrenders and withdrawals beyond basis may be taxable income and subject to penalties if taken prior to age 59 ½. Excessive and unpaid loans will reduce policy values and may cause the policy to lapse. In order to receive favorable tax treatments on distributions made during the lifetime of the insured (including loans), a life insurance policy must satisfy a 7-pay premium limitation during the first seven policy years. A new 7-year limitation will be imposed after certain policy changes. Failure to satisfy this limitation would cause your policy to be considered a Modified Endowment Contract (MEC).  

Information provided regarding tax or estate planning should not be considered tax or legal advice. Consult your own tax professional or attorney regarding your unique situation.