Is Repayment Required When Borrowing Against a Whole Life Insurance Policy?

If you bought a whole life policy, it could be growing cash value. This is money you can use while you are still alive. You access this money by taking a loan from your policy. One nice feature about life insurance loans is that you do not need to pay them back. However, not repaying your loan could result in extra taxes and a smaller inheritance for your heirs.

Cash Value

You can only take a loan out of your life insurance if it has cash value. Not all whole life insurance policies offer cash value. Some just offer life insurance protection that lasts your whole life. Also, your policy might not have any cash value because it's too new or you used your cash to pay your premiums. Check with your life insurance company to see if your account has any money that you can borrow.

Keep the Policy

If you take out a loan from your insurance, you do not need to pay it back. One way to do this is by taking out the loan and keeping your policy active. When you die, the insurance company will deduct the loan and accrued interest from your death benefit and give whatever is left to your heirs. This way to take out your earnings makes your investment earnings tax-free. You won't owe any tax when you take out the loan. Since life insurance death benefits are income tax-free, your heirs won't owe anything either. The downside of this approach is you need to keep paying your insurance premiums.

Cancel the Policy

You can also avoid repaying your loan by canceling your life insurance policy. If you do this, you won't owe any future premium payments to your insurance company. However, you might owe income tax. The IRS does not tax the return of the premiums you paid into the policy However, if your cash value grew and is larger than what you paid into the policy, you'll owe income tax on the earnings. You also lose your life insurance coverage when you cancel the policy.

Repay the Loan

When you borrow from your life insurance, you can pay the loan back. It is up to you how much you want to pay back to the life insurance company. Whatever you repay will go right back into your cash value balance. It will continue to grow, and you can borrow this money again. Repaying the loan gives you more money to spend in the future. It also creates a larger inheritance for your heirs as your death benefit won't be used to repay a loan.

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