Actually, borrowing against your life insurance is one of the things whole life, universal life, and variable universal life polices are designed for. The question really, is how do you know whether you should borrow from your policy or from somewhere else?
During the first 5 – 10 years your life insurance policy is in force, there is not enough money accumulated to make it worth while, unless you have been “over-funding” the policy specifically for that purpose.
Once there is enough money to be useful, the question becomes: should I borrow money from the policy, borrow from somewhere else, or surrender the policy?
Do not surrender the policy unless you absolutely have NO other alternative. Any future policies will cost more and may be impossible to get if your health begins to have problems.
Borrowing from other sources like banks, home equity loans, credit cards, etc. is an option to consider. How much money do you need? What is the interest rate? What will the payments be? Can you afford the payments and still keep paying money into your life insurance policy?
Borrowing from your life insurance policy normally has a lower interest rate than other sources. Borrowing against your life insurance does NOT remove the money from your policy; it is still there earning interest. The interest and principal do not have to be paid back on a specific schedule; you will get an annual statement which tells you the annual interest which you can either pay or add to the loan amount. You can pay the principal back at any time or never pay it back.
So far, borrowing from your life insurance sounds like a good deal. The problem arises when your life insurance policy’s cash value and the loan amount start to get too close. Then, there may not be enough money between your payments and the interest earned by the policy to pay the annual cost of the insurance. If that happens you will have to pay much larger insurance premiums to keep the policy in force or it will lapse and you will no longer have your policy.
Take a close look at the reasons why you need the money, will you be able to repay the money if you borrow from another source, will you be able to pay the interest and/or the principal if you borrow from your insurance policy.
Only you know these things; and only you can make the decision; but now, you know what things to consider in making that decision.