In addition to providing financial protection for your loved ones, owning a permanent life insurance policy (whole life, indexed whole life, universal life, indexed universal life or variable universal life insurance) can offer some flexibility when you need it.
When you own a permanent life insurance policy, your policy has the potential to build cash value and you may be able to access the cash value if you need it through a policy loan.
The loaned funds can be used however you’d like. Loans can serve as a source of supplemental retirement income, help with a loved one’s college tuition, or help pay for unexpected expenses.
How do life insurance loans work?
When you borrow money, the cash value in your policy acts as collateral for the loan. The loan does accrue interest and is added to the loan balance.
You have control over when and how you repay the loan. If the loan is not repaid before your death, the policy death benefit will be reduced by the outstanding loan balance.
Here are some pros and cons to consider:
- No credit check, income, or approval process. Your financial representative or customer service can share if any forms are required for a loan request.
- You choose your payment plan. There is no required payment plan or payback date for a life insurance loan.
- The loan is not reported to credit agencies and will not appear on your credit report.
- Policy loans are not taxable as long as the policy stays in force.
- Loan interest is charged and added to the loan balance.
- The death benefit will be decreased by the amount of the outstanding loan and loan interest.
- To keep the policy insurance coverage, the policy’s loan balance cannot exceed the total cash value in the policy, since the cash value is serving as collateral for the loan. If the balance and any interest exceeds the total cash value, payment may be due, otherwise the policy can lapse which would result in loss of insurance and adverse tax consequences.
Have more questions about loans? These frequently asked questions may be helpful:
How much can you borrow for your life insurance policy?
The amount of money you can borrow against your policy is directly connected to the policy’s cash surrender value – the higher it is, the more you can access in a loan. You can’t, however, borrow more than the cash value of your policy (including the loan’s interest charges). To find the cash value of your policy, you can log into your account and check the “Cash and Loan Values” sub-tab under “Policy Summary.” Use this value as an estimate only. The value may be different due to incoming payments, expenses, etc. To get the most accurate loan value, please contact Customer Service by clicking the “Contact” tab (be sure you are logged into your account). You can fill out the contact form to start the loan conversation. Or, call 800.366.6654.
Are there tax implications to taking a loan?
Generally, loans are tax free. However, if your policy were to lapse, and you had borrowed more money than you paid into the policy, then there may be tax implications.
When do you have to repay a life insurance loan?
With a life insurance loan, you get to choose when and how you want to repay the loan. There is no set payment plan.
How do you repay the life insurance loan?
Loan payments may be made in full or partial payments via automatic bank draft or check and are applied to the current year’s interest first and then to principal. There may be other payment options depending on the type of life insurance that you own. Talk to your AuguStar financial representative or Customer Service at 800.366.6654 to find out which options may be available to you.
How do you make a loan request or borrow from your policy?
Start by talking to your AuguStar financial representative or by calling Customer Service at 800.366.6654. Depending on the amount of your loan request, you may need to complete a form. Limited loan amounts are available via phone.
How long does it take to get a loan?
From the time the request and any necessary paperwork is received, it usually takes five to 10 business days to process the loan and send a check or to direct deposit the loan proceeds.
Consult your representative before taking a withdrawal or loan. Withdrawals and loans may cause loss of the no lapse guarantee. In addition, withdrawals may incur substantial charges and tax penalties. Withdrawals and loans will reduce the death benefit and cash surrender value. Surrender charges may apply to withdrawals. Consult your policy to see if surrender charges apply.
If you are considering the use of policy loans as retirement income, you should consult your personal tax adviser regarding potential tax consequences that may arise if you do not make necessary payments to keep the policy from lapsing.
If tax-free loans are taken and the policy lapses, a taxable event may occur. Loans and withdrawals, if taken, will reduce the death benefit. Withdrawals (partial surrenders) and loans from life insurance policies that are classified as modified endowment contracts may be subject to tax at the time that the withdrawal or loan is taken and, if taken prior to age 59½, a 10% federal tax penalty may apply. Always consult with a tax advisor regarding your particular situation.
This material provides general information that is designed to be educational in nature and is not intended as specific tax or legal advice to any particular individual nor the law of any particular state. Please seek the advice of a qualified tax or legal professional for your specific situation.
Products are issued by and guarantees based on the claims-paying ability of the AuguStar Life Insurance Company and AuguStar Life Assurance Corporation. Product, product features and rider availability vary by state. Issuer not licensed to conduct business in NY.