Borrowing Against Your Life Insurance Policy to Fund a Business
Various life insurance schemes have common characteristics that allow you to borrow against the fund the policy builds up. Term insurance is the exception, because term insurance has no fund worth. With other policies, it takes two to three years to access the money, because by then enough cash will have accumulated and be ready for borrowing. Such money may be used to execute a business project.
However, the loan decreases the policy's worth, and when death occurs, the loan must be refunded before the beneficiaries of the policy can withdraw any payment.
There are different types of life insurance policies.
Permanent life insurance. This is insurance in which the policy has no closing date. Its policies are tax-friendly: as long as the policy runs, the policyholder pays no taxes on income, and the growth of the cash value is on a relatively tax-deferred basis.
Whole life insurance. Part of the advantage of this type is that the worth of the money increases as it accumulates continually. The policyholder can borrow or withdraw money from the savings account while still alive.
The point to keep in mind is that this source of funding is built from your own policy. It is different from a bank loan or an outside investor, and the money you take out reduces the value that stays in the policy. If you use it for the business, plan the refund, because the policy's payout to beneficiaries depends on it.
For an entrepreneur who already holds a permanent or whole life policy, it can be a source of capital that does not require applying to investors. For one who holds only term insurance, it offers nothing to borrow against.