5 Things to Check Before Borrowing From a Life Insurance Policy

If you’ve found yourself in a financial bind because of crippling medical debt, you’re not alone: Financial side effects can be just as serious and severe as physical ones when it comes to life-threatening conditions like cancer. Many cancer patients are in need of quick cash to pay down mounting medical bills, prompting some to cash in or borrow against their life insurance policy. While this is an option for many, there are a number of factors to consider first.

Here are 5 things to check before borrowing from a life insurance policy:

1. Will your death benefit be affected? No one wants to leave their loved ones unprotected after they pass, so it’s important to understand how a loan against your life insurance may impact the death benefit you’ve likely long invested in for your beneficiaries.

2. Is there an opportunity cost? Lenders may sneak in a number of added fees, such as this one that refers to the difference between the amount your invested premiums were earning and the amount of interest you’ll be paying.

3. Understand the interest rates. Most life insurance loans range from 5% to 8% interest rate, and it is compounded—meaning you’ll essentially be paying interest on your interest, which might be a deterrent for some individuals in the long term.

4. Calculate your actual payments—and your ability to make them. Factor in interest and determine just how much you’ll be paying back on the loan, and for how long. Add in other expenses and weigh this against your income to determine if borrowing against the policy is a feasible financial decision.

5. Don’t simply rely on the dividends. While you may be inclined to think that the dividends would cover the added interest, that approach may be worth a second look. Borrowing against the cash value ultimately reduces the amount of dividends—meaning the interest may exceed the dividend value.

Meet with a financial advisor to carefully consider these 5 things to check before borrowing from a life insurance policy, as well as all of your options. Other alternatives may be more cost-effective for your particular situation. Life Credit’s Living Benefit Loans, for instance, allow life insurance policyholders—both term and whole—to borrow against their death benefit to cover emergency medical expenses. It’s important to weigh all of these considerations so that you can make the most effective and efficient financial decisions for your future.