Secured Loan or Collateral Loan

It can be tempting to tap into the cash value of a life insurance policy that has been accumulating for many years. However, unlike normal investment accounts, accessing life insurance cash value is not a straightforward process. There are three ways to access your cash value: surrender, policy loan, or a secured loan. Each method has implications that should be fully understood as they can have a serious impact on your tax bill.

Over this series of articles, we will look at defining these methods as well as exploring their implications.

We previously defined and looked at the implications of the first and second methods — Surrendering Your Policy and Policy Loans. Now, let’s define the third: Secured Loan or Collateral Loan.

Secured Loan or Collateral Loan

Life insurance cash value is considered to be an asset of the policy owner and therefore it can be used as collateral on secured loans. There are many financial institutions that will issue lines of credit up to a certain percentage of a policy cash value (usually 50%-75%).

Interest does accumulate on the loan and depending on the loan contract the policy owner may have the option to defer payment of the interest until their death, at which time the death benefit of the policy will cover any outstanding interest.