A Policy Loan: Everything you need to know

What is a policy loan and what are the benefits in comparison to a business loan? How does a policy loan work?

If you are seeking some extra capital for your small business in order to expand or improve your operations, there are many funding options to choose from. While you may be familiar with a getting a standard business loan from a bank, a less common source of funding could come from your life insurance policy.

How a Policy Loan Works

Some life insurance companies will lend you money against your loan policy. If you carry a policy of $50,000, you can approach your insurance company for a business loan for some or all of your policy’s value. If you require money to redesign the front of your store or to launch a new marketing campaign for a new line of products, you can access this money from your policy.

A policy loan is a loan and is, therefore subject to interest. After all, the insurance company is using your money to build their own capital by investing it in various interests. By taking the loan, you will be reducing their investment base, thus decreasing their investment return. To counteract this, they will require you to pay interest on your loan even though you are technically using your money to make this business loan to yourself.

The Benefits of a Policy Loan

One of the benefits of taking out a policy loan is that there is no obligation on how you use the money. This means that if you suddenly change your mind about how you want to use the loan, no penalty will be applied.

Another positive aspect to the policy loan is the repayment process. Unlike a standard business loan, there is no set repayment plan. In fact, because the money is technically yours, you have no obligation to repay at all.

This advantageous in that it protects you in the event that your investment in the business does not pay off.

However, you should be aware that by borrowing this money, you effectively reduce the total payout of your policy by the amount of money you borrowed plus interest. Thus, if you borrow $10000 against a $50000 policy, you will only have a $40000 payout.

Many small business owners have considered this option of increasing their capital through a policy loan and have found it to be too risky for the potential returns. Therefore they have opted to try a different method called business cash advances. Business cash advances are similar to policy loans, in that they do not require repayment.

But business cash advances are superior to policy loans, as they do not compromise your family’s security in a time of hardship. These advances are based solely on the purchase of future credit card transactions.

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