Blog

Should you borrow from your life insurance to pay off debt?

By Debt.ca on March 30, 2021 No Comments
Canadian dollars

Most of us have found ourselves in a financial jam at some point in our lives.

If you’re looking for a loan, consider looking at your life insurance policy. You may be able to borrow money from your insurer. The great news is that the process is simple. The repayments are flexible, and it’s usually cheaper than borrowing from a bank.

Here’s how it works.

What is cash value life insurance?

Cash-value life insurance is a form of whole life insurance. When you pay premiums to the insurer, they put a portion into a cash-value account. You can access the account. The money in the cash-value account is invested, so it usually grows over time. If you choose to cancel your coverage, your insurer will pay you the cash value minus some termination fees.

How Borrowing from a Life Insurance Policy Works

You can borrow some of the cash value of your policy. However, it’s important to note that the cash value usually accumulates slowly. You may not be able to borrow much in the first few years. You will also owe interest on the amount you borrow.

should a family borrow life insurance for debt

Do You Have to Repay the Loan?

Unlike a regular loan, there are no forced repayments. The interest you owe just keeps accruing. If you never pay back the loan or the interest, then the insurer will either reduce the amount of your coverage or take the money out of the benefit paid to your dependents.

Loans and withdrawals on life insurance are treated very differently for tax purposes. If you don’t repay your loan, they treat it as a withdrawal. If so, you could end up paying extra tax.

Why Borrow from a Life Insurance Policy vs. the Bank?

There are a lot of reasons to choose a life insurance loan over a bank loan. Here are a few of them:

Access

When you borrow from an insurer, your life insurance policy is used as collateral. Essentially, there are fewer credit checks and hoops to jump through.

Credit impact

Life insurance loans don’t appear on credit checks, so they won’t affect your credit score the way a bank loan can.

Flexibility

You have the flexibility of choosing your repayment schedule with a life insurance loan. Conversely, a bank will insist on regular repayments.

Lower interest rates

Unlike a life insurance loan, credit cards and personal loans don’t require collateral. This means they usually have higher interest rates.

Top tip

Because insurance policies are taxed differently than bank loans, speak to your accountant about which method is best for you.

Before You Borrow

Loans against insurance policies can be complex and need to be carefully managed. If you don’t repay your interest, your debt will grow too large, and your policy can be cancelled.

It’s critical to speak to a financial advisor or your life insurance agent before you borrow from your insurer. Your advisor can run an “in-force illustration” for you. This will tell you how much the loan will cost you if there are hidden fees, and what the long-term impact will be on your insurance coverage.

Conclusion

Combining life insurance and lending can get complicated. But if you do your homework, get good advice, and keep an eye on your balance, life insurance loans offer a great alternative to standard bank loans.

 

This article was written by:

Greg Rozdeba, Dundas Life

Greg is the Co-Founder of Dundas Life, a digital life insurance brokerage. He specializes in helping people find the right insurance coverage for their loved ones right from the comfort of their homes. Visit dundaslife.com and get started in 5 minutes or less!

Avatar

Debt.ca

Admin


The difference in credit cousnelling vs consumer proposal

Credit Counselling vs Consumer Proposal

By Joe Torraca on September 15, 2021

According to Statistics Canada, only 30.2% of Canadians are living debt-free. The remaining 69.8% owe about $79,000 per household in total debts. Debt can be overwhelming, particularly if the debt owed is so great that you can’t afford each monthly payment and you’re getting collection calls from creditors. Fortunately, bankruptcy is not the only option. Debt…

jar of coins for emergency funds and rainy day savings

The Importance Of Emergency Funds For Financial Security

By Debt.ca on September 14, 2021

The ultimate goal of emergency funds is to have a chunk of easily accessible money that acts as a stabilizer for your entire life. Having a safety net can turn unexpected expenses into slight hiccups. It’s no surprise that many Canadians are within $200 of being unable to cover their bills. What would you do…

A couple shopping and reducing their food budget

How to Reduce your Food Budget

By Debt.ca on September 8, 2021

Savvy shoppers are always looking for valid food budget tips. And who could blame them? According to Canada’s Food Price Report 2021, annual food expenditure could go up by as much as $695 compared to 2020. If you are in debt, consider some ways you can stretch your food budget to put extra money towards what…

man finding out his mortgage is not approved

What if my mortgage is not approved?

By Debt.ca on August 23, 2021

It’s devastating news to hear: the application for your mortgage is not approved. Whether it was for a new home purchase, a refinance, or a renewal, mortgage loan forgiveness can leave you scrambling for alternatives. Not getting approval for a mortgage happens frequently. According to the CMHC’s Residential Mortgage Industry Report, the approval rate for mortgages…

No Comments Leave a Comment  

Leave a Comment

Free Savings Estimate

How much do you owe?

$100,000

$5,000
$100,000
Live Chat
Welcome to our Live Chat
Agents are not available at this time. Please leave a message. Thank you.
First Name
Last Name
Phone
Email
Postal Code
Debt Amount
 
PHP Live! powered