How to Borrow Against Life Insurance

by Ryan Hart | Updated on October 27, 2024 | Post may contain affiliate links. As an Amazon Associate we earn from qualifying purchases.

Borrowing against a life insurance policy can provide quick access to cash.

You can borrow up to the cash value of a permanent life insurance policy without going through credit checks or loan applications.

This option is available only for permanent policies like whole or universal life insurance, not term policies. The cash value of these policies grows over time as premiums are paid.

One of the advantages of life insurance loans is the low interest rates. Plus, you’re essentially borrowing from yourself.

While repayment isn’t mandatory, it’s wise to do so, as unpaid loans reduce the death benefit for your beneficiaries. Always consider the pros and cons before tapping into your policy’s cash value.

To get a policy loan, follow these steps:

  • Contact your insurance company.
  • Ask about loan options and interest rates.
  • Complete a loan request form.
  • Choose how to receive the funds (e.g., check or direct deposit).
  • Review and sign the loan agreement.

The process is usually quick, with funds often available within a few days.

Some insurers allow you to apply online or by phone, while others may require mailing a form. Ask your insurer about their preferred method.

What type of life insurance can you borrow from?

Term and permanent are the two most common types of life insurance.

A term life insurance policy can be purchased for a set amount of time, like 10 or 20 years. You will be covered as long as you continue to make the monthly payments. It’s usually more affordable but doesn’t build cash value.

Permanent life insurance gives coverage for your entire life. While it costs more, it includes a savings component that grows over time.

Whole life, universal life, and variable life insurance policies have their own rules on how the cash value accumulates.

The “cash value” is the savings feature of permanent life insurance policy, that grows tax-free over time. You can borrow against it or use it to pay premiums.

The cash value increases as you pay premiums and earns interest or investment returns, depending on the type of policy you have.

You can take out loans against your cash value, which can be helpful for covering large expenses. However, if the loan isn’t repaid, it may reduce the death benefit.

How much can I borrow from my life insurance policy?

To borrow from your life insurance, you need a permanent policy, such as whole life or universal life. Your policy must have accumulated cash value, which builds up over time as premiums are paid.

Life insurance companies may allow you to borrow up to 90% of your policy’s cash value without a credit check, as the cash value serves as collateral for the loan.

Check with your insurer to confirm your policy type and cash value amount to determine how much you can borrow.

How soon can you borrow against a life insurance policy?

You can take a loan against your life insurance policy once the cash value component reaches a minimum balance.

The loan amount you can get depends on the cash value balance, which serves as collateral. The time required to accumulate sufficient cash value varies based on your policy’s terms, growth rate, overall size, and the desired loan amount.

This process may take anywhere from two to ten years or more after purchasing the policy.

While this waiting period might sound like a long time, remember that life insurance policies are designed for long-term financial protection.

The main advantage of life insurance is that the full death benefit is available to your beneficiaries typically from day one, even if you don’t have enough to borrow against.

The primary purpose of life insurance is to provide a cash payout to your beneficiaries after you’re gone. The cash value growth and loan options are just extra features.

Do you have to pay back a life insurance loan?

Policy loans come with flexible repayment terms. You can repay the loan on your own schedule, or not at all. If unpaid, the death benefit will be reduced by the loan amount when you pass away.

Interest rates on policy loans are often lower than a credit card or personal loan and can be fixed or variable. You’ll continue to accrue interest as long as the loan is outstanding.

You can make payments at any time, and some people opt to pay only the interest to prevent the loan balance from growing.

What happens if you don’t pay back a life insurance loan?

Taking out a loan reduces the death benefit your beneficiaries will receive. The amount borrowed, along with any unpaid interest, is deducted from the death benefit.

If your loan balance becomes too large, it could deplete the cash value, potentially causing your policy to lapse and leaving you without life insurance coverage.

It’s important to borrow only what you need and monitor your loan balance to prevent it from getting out of control.

If your policy lapses or you surrender it with an outstanding loan, you won’t owe taxes on the money borrowed from your life insurance, as the IRS treats it as a loan rather than income. However, there are exceptions. The IRS could consider part of the loan as taxable income.

Additionally, if you have a modified endowment contract (MEC), loans are taxed differently, and you’d need to pay income tax on any gains withdrawn, even as a loan.

Consult a tax professional to help you understand the tax implications of borrowing from your specific policy.

Alternatives to Life Insurance Policy Loans

There are other ways to access funds from your life insurance policy or secure money elsewhere. Each option has different impacts on your policy and finances.

Withdrawal vs. Loan

You can take a withdrawal from your policy instead of a loan. This permanently reduces the death benefit, and you may owe taxes if you withdraw more than you’ve paid in premiums. Withdrawals are usually limited to a portion of the cash value.

A loan keeps the full death benefit intact if repaid, but you’ll need to pay interest, and the insurer may charge fees for the loan. It’s important to check with your insurer about limits, costs, and tax implications before deciding.

Surrender Policy for Cash

You can cancel your policy and receive the surrender value, which ends your coverage entirely. The surrender value is often less than the full cash value, especially in the early years of the policy.

You may owe taxes on any amount over what you’ve paid in premiums, which can be costly if you’ve held the policy for a long time.

Once surrendered, the policy cannot be reinstated, and you’d need to apply for new coverage if you want insurance again. This could be difficult or expensive if your health has changed.

Personal loans

You might consider looking for money outside your life insurance policy. A personal loan or line of credit could be an option, with interest rates that might be lower than policy loan rates. However, you’d need good credit to qualify.

Alternatively, you could seek help from family, which avoids fees but might strain relationships. Agreeing on repayment terms upfront is essential.

Selling valuables or getting a jewelry loan are other options that don’t involve your insurance policy, though they may require more effort.

Frequently Asked Questions

Here are the most common questions I get asked about borrowing against life insurance:

Can you borrow against term life insurance?

No, you cannot borrow against a term life insurance policy. Term life insurance does not build cash value. This means there is no money to borrow against.

Term life insurance will only provide protection for a specific time. It pays a death benefit if you pass away during the policy term.

If you want to borrow money, you need a permanent life insurance policy, like whole life or universal life insurance. These policies have cash value that grows over time.

Some term policies can be converted to permanent ones. This allows you to borrow against the policy later.

Are there any life insurance policies you can borrow from immediately?

Yes, if you purchase a whole life insurance policy with a lump sum payment, you can borrow from the balance immediately.

But if you are paying regular monthly premiums, then no. You can only borrow from your policy after it has accumulated some cash value, which usually takes a few years of paying premiums.

The exact timing depends on your policy type and terms. Check with your insurance company to find out when your policy will have cash value available for loans.

About the Author:
Ryan Hart

Ryan Hart is a licensed insurance agent, writer, and former home designer. He is on a mission to help couples protect their homes in retirement with life insurance and annuities.

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