4 Times It's Okay to Borrow From Your Life Insurance Policy

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Borrowing cash from your life insurance policy can be better than getting a traditional loan. There's no credit check and you're not obligated to pay back the policy (although not repaying the policy reduces the death benefit paid to your beneficiaries). If you do decide to pay it back, the interest is often lower than a bank loan.

Of course, some will argue that you should never ever borrow or take money from your life insurance policy. But it might actually make sense under certain conditions — like these.

1. You Lost Your Job

You can be a hard worker and give your boss 200%, but there's no such thing as job security anymore, and employers aren't exactly loyal nowadays. Even worse, you may not be fortunate enough to receive severance pay, and unemployment compensation will likely be a percentage of your regular earnings. In a perfect world, we would all have a six to 12-month emergency fund to carry us through tough times. Unfortunately, this isn't always the case. If you have a small cash reserve and not enough income to keep up with basic expenses, borrowing from your life insurance policy can provide funds to keep your head above water as you search for another job.

2. You're Temporarily Unable to Work

If you're offered short-term disability through your employer, this is a policy you can't afford to skip. You're probably thinking, "but I never get hurt," or "I don't do anything to get hurt." That may be true, but you never know when you might be unable to work for more than two weeks because of an injury or illness. A disability policy pays between 50% and 70% of your regular salary, reducing financial worry and stress while you recover. Yet, not every employer offers short-term disability, and some employees don't think of purchasing a policy on the individual market.

If you don't have disability and can't work because of an illness, it might be impossible to make ends meet with a whole life policy as your backup plan. Between the cash value of the policy and any funds in savings, you might have enough to cover expenses until you're healthy to work again. It's not the most ideal solution, but a viable one nonetheless.

3. You Need Cash for a Home Purchase

Between a down payment and closing costs, buying a house is one of the most expensive transactions you'll likely ever make. You can purchase with a minimum 3% down if you have good credit. This is far less than 20%, but still a lot of cash to cough up, especially after factoring in the high price of closing costs, which range from 2% to 5% of the purchase price depending on where you live.

If you have some cash saved for a house purchase (but not the full amount), borrowing from a whole life policy helps you purchase sooner rather than later.

4. You're Starting a Business

Punching a timeclock and dealing with a tyrant boss makes for a long, stressful work week (or career, depending how you look at it). Maybe you've had enough and you're ready to start your own business and control your future (which I highly recommend). Unfortunately, it often takes money to make money. If you're not comfortable blowing through your savings account in order to build your empire, borrowing from your life insurance policy can get your business off the ground. Use this money to invest in yourself, and once your company grows and you're earning more than ever before (because, ya know, fingers crossed!), you can pay back your life insurance policy.

Are there other times that you think are okay to borrow from your life insurance policy? Let us know in comments.