Life insurance is primarily about giving your loved ones financial security when you’re no longer around. But did you know that certain policies can be valuable in your financial strategy? If you’re already familiar with life insurance, you might recognize the term “cash value.”
This feature allows you to borrow against your policy once you’ve reached a certain level of premium payments.
It’s a handy option when unexpected expenses pop up, but it’s important to weigh the pros and cons so that you don’t jeopardize your investment.
Want to know more about what taking a life insurance loan with Nationwide involves? Keep reading!
How the national life insurance loan works?
Not every life insurance policy builds cash value, take term life insurance loans, for example. While term life policies come with lower premiums, they only offer a death benefit without the added cash value.
On the other hand, whole or universal life insurance build cash value over time, which might allow you to take out a policy loan.
When you borrow against the cash value of your insurance policy, the insurer uses your death benefit as collateral.
Essentially, if you repay the loan with interest in full, the original death benefit is restored to what it was when you first purchased the policy. But if you don’t repay it, the company will subtract the loan amount plus interest from your policy’s death benefit.
Here are some of the advantages of taking a loan from your life insurance policy:
- You can simply access your accrued cash surrender value tax-free with a life insurance loan;
- As long as the value for money is there, approval is guaranteed.
- Any use of the borrowed funds is permitted;
- The loan can earn interest since it is money that is being borrowed rather than withdrawn from the policy.
What types of policies can I borrow against?
Most permanent life insurance policies allow you to borrow directly against the accumulated cash value of your premium payments.
Permanent insurance provides coverage for your entire life and includes whole life, universal life, and variable insurance options.
A whole life insurance policy builds cash value over time as premium payments are made. Consequently, this allows you to borrow funds from the insurance company.
This capital accumulates interest or is invested in an account, facilitating growth through the compounding mechanism.
With term life insurance, please note that loans are not an option with this type of coverage. The primary purpose of term life insurance is to provide you with protection for the long term.
What is the maximum amount that can be borrowed against a life insurance policy?
Life insurance policies allow loans as long as the cash value is sufficient. The loan amount is stated as a percentage of the cash value.
While each insurance company sets its own rules, typically, loan limits are between 90 to 95 percent of the available cash value.
How to monitor a life insurance policy loan
Since the insurer does not require you to maintain a specific payment schedule, it will not provide one. You can either pay the interest on the loan out of pocket or let it accrue annually.
In this case, the loan balance will increase as it accumulates each year due to compounding interest.
It is also wise to request an illustration of the policy in force annually to monitor the effect of a policy loan on your coverage. These should be the scenarios requested, in addition to any others that apply to you:
- Payment of the policy loan in full;
- Payment of premiums and interest from funds out of pocket;
- Subsequent loans of premiums and interest;
- Premium required to hold the contract until full maturity;
- Any other actions you are considering, such as partial withdrawals or changing your dividend options.
How to pay off your national life insurance loan?
Ideally, the loan is repayable by cash remittances to the life insurer. The cash payment will increase the policy value and death benefit.
But if the policy’s premiums are reduced, and the cash value is more than enough to cover the premiums, the policy loan can be repaid with “excess” cash value.
On the other hand, if you still owe money on a policy loan when you die, the balance will be taken out of the death benefit and your beneficiaries will receive a reduced benefit.
However, since death benefits are tax-free, this would be the most efficient way to repay policy loans.
How to access the loan from your Nationwide Life Insurance policy?
Once enough money has accumulated in your account, there are several methods available to access it:
- Loan: You can take a loan from your account, provided you have met the critical conditions that qualify you for it, as the amount you can borrow is largely determined by the terms of your policy.
- Life settlement: A life settlement is the sale of your policy for cash to a company or an individual who pays the premiums and receives the death benefit. Typically, the individual must be at least 65 years old and have a death benefit of $100,000 or more.
- Surrendering your policy: This is when you surrender your policy to access the money in your account. Here, you will pay surrender charges and any gains on the policy will be taxed as income.
Final thoughts
Only permanent life insurance permits the policyholder to accrue cash redemption value, even though all policies provide protection against death benefits.
After the first policy year, loans are available whenever you choose. However, it usually takes many years to accumulate significantly high cash values in a permanent insurance policy.
If you don’t have readily available funds and are considering borrowing money from your life insurance policy, be sure to speak to an advisor first. They can listen to you, understand your situation, and then recommend what the best solution would be for you.
