Whole Life Policy Loans: How They Work
One of the least known and best features of a whole life policy is its “living benefits”. These living benefits give you the ability to borrow against its cash value. As the cash value accumulates, you can access from 85 to 90% of it in the form of policy loans at any time, for any reason, with no questions asked.
The reasons to obtain policy loans are only limited by your imagination. Anything from personal to business needs or retirement income. You can even lend money to friends or family and generate a profit for yourself.
Since the money, you receive as a loan does not come from the cash value of your policy, but from the general account of the insurance company, the cash value in your policy continues to earn guaranteed interest and dividends while the loan is outstanding. Your money is doing double duty.
The interest on loans that the insurance company charges are typically below-market, between 4 and 7% now. As you pay back your loan with interest, the money does not go back to your policy ― since it didn’t come from your policy either ― it goes back to the insurance company, from where it originated.
Regarding paying down your loans, you are not contractually obligated to pay policy loans; However, if you are still working, it is to your advantage to pay your policy loans back. That way, you replenish the amount available for future loans. If you are retired and using the loans to supplement retirement you don’t have to pay them back.