When It Makes Sense to Borrow From Your Life Insurance Policy

NEW YORK (MainStreet) — Borrowing from your life insurance policy can be a better bet than taking out a loan from your 401(k) or credit card, experts said.

Since the repayment period for a life insurance policy can be indefinite, consumers can wait until they are drawing a regular paycheck before they start making payments.

Raiding your 401(k) or IRA funds may seem more like financial suicide. While you do not pay penalties or taxes on the income you receive from the loan, all of the loans require you to pay interest. One big drawback is if you are laid off, fired or quit your job, most companies require their employees to pay the entire loan back within 30 or 60 days.

In most cases, you are allowed to borrow only half of your 401(k) balance or up to $50,000, said Ray Caucci, vice president of product management at Penn Mutual Life Insurance Company in Horsham, Penn. The repayment period for the loan varies with each company, but it is generally five years, he said.

Taking out a loan from your life insurance policy is a better option than taking out a personal loan since a credit check or business plan is not required and you can borrow a large amount if needed, Caucci said.

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"There is no fixed term for the loan, you just need to make sure that policy remains in force," he said. "The loan repayments can be made on the policyholder's schedule No additional collateral is required since the policy's cash value is the collateral for the loan."

Another advantage is that interest can be capitalized on the policy loan, meaning there is no requirement to pay interest, Caucci said.