What is a Universal Life Insurance Loan?
A universal life insurance loan is a borrowing option available to policyholders of universal life insurance policies. These policies combine a death benefit with a cash value component, which grows over time based on interest credits. The cash value serves as collateral for the loan.
How It Works
When you take out a loan against your universal life insurance policy, you are essentially borrowing from the cash value you have accumulated. The insurance company does not require a credit check or formal application process for these loans. Instead, the loan amount is deducted from your cash value and can be repaid at your convenience.
Interest and Repayment
Loans against universal life insurance policies typically accrue interest, which may be added to the outstanding loan balance. If the loan is not repaid, the unpaid amount, including interest, will be deducted from the death benefit when the policyholder passes away.
Pros and Cons
- Pros: Easy access to funds, no credit checks, flexible repayment.
- Cons: Potential reduction in death benefit, accumulated interest, and impact on cash value growth.
In summary, a universal life insurance loan provides a way for policyholders to access cash value without losing their coverage, but it requires careful consideration of the potential financial impacts.