How To Borrow Against Life Insurance (2024Guide) (2024)

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Key Takeaways

  • You can borrow against life insurance only if you have a cash value policy like whole life insurance or universal life insurance.
  • Look up the current cash value of your policy and ensure you understand your policy terms before borrowing.
  • You can apply for a policy loan online or contact your insurance agent, depending on your insurance provider.

Can I Borrow Against My Life Insurance Policy?

To borrow against your life insurance policy, you must have cash value life insurance, such as universal or whole life insurance. With these policies, a portion of each premium payment goes toward building a cash value, which operates as a tax-deferred savings or investment account.

Once the cash value reaches a certain threshold, the policyholder can withdraw or borrow from that account. Keep in mind that it may take several years for your policy to accumulate enough value for a policy loan or withdrawal.

Not all life insurance policies have a cash value to borrow against. In fact, that is one of the main differences between term and permanent life insurance. While term life insurance expires after a certain time period and has no cash value component, permanent life insurance policies offer lifelong coverage and build cash value over time.

You cannot borrow against term life insurance, but you may be able to convert your term policy to a permanent one, which would open the door to borrowing money in the future. Speak to your insurance agent to see if your policy qualifies. If you have a convertible term life insurance policy, you can upgrade to whole or universal life insurance without undergoing a new health exam.

How Does a Life Insurance Loan Work?

Life insurance policy loans allow you to borrow money from the insurance company using your policy’s death benefit and cash value as collateral. As long as you pay the loan back, the entire value of your policy stays intact. However, if you fail to repay the entire amount before you die, the insurance company will deduct the outstanding loan balance, including any interest owed, from the death benefit. As a result, your beneficiaries will receive a lower payout.

Borrowing against a life insurance policy does not require an income or credit check because the loan is fully secured, with the policy’s cash value serving as collateral. Policy loans also tend to have relatively low interest rates — particularly when compared to unsecured personal loans. Your credit score will not affect the loan approval or interest rate, and the loan application and repayment will not affect your credit score.

The cash value of your policy must exceed a certain amount before you can take out a policy loan. However, that minimum varies by insurer. You can check your policy documents or ask your insurance agent for specific details. The approval process typically involves submitting a simple form and verifying your identity.

Paying Back a Life Insurance Loan

Unlike most loans, policy loans do not have a fixed repayment schedule. However, that does not mean you should neglect repayment entirely. Here are a few tips for handling repayment:

  • Ask how to make a payment: Make sure you have all the payment information on hand to make a payment promptly when needed. In particular, note your account number and the repayment address for your insurer. These details should be listed on your loan statements.
  • Keep track of the interest: If the principal plus interest ever exceeds the cash value of your policy, your insurance will be at risk of lapsing. At this point, you will need to make minimum interest payments to avoid forfeiting your insurance coverage.
  • Avoid policy lapses: Keep up with your premium and interest payments to avoid a policy lapse. If your policy lapses or you surrender it before repayment is complete, the IRS will recategorize your loan as taxable income.
  • Set up automatic payments: Consider setting up automatic payments through your checking account. This will help you avoid missing an important payment.
  • Make a plan: Decide whether you intend to fully repay the loan, pay the interest as it accumulates or do the bare minimum to avoid a policy lapse. Then, draft a repayment plan. Figure out how often you should make a payment and how much to pay to stay on track.
  • Inform your beneficiaries: Discuss your decision with your beneficiaries so that they know what to expect. If your loved ones do not know about the loan or repayment plan, they may be blindsided by a significantly reduced death benefit.

Pros and Cons of Borrowing From Your Policy

One of the biggest advantages of borrowing from your policy is that policy loans have fewer credit and tax implications than other loan types. The IRS does not recognize policy loans as income, making them a tax-free funding source. You can use the money however you like, and you will not be tied to a strict repayment schedule. The loan will not affect your credit score, nor will your credit score affect the loan’s interest rate.

You can obtain a policy loan without undergoing employment verification or a credit check. You do not have to meet a certain income threshold or put up other assets as collateral. The only requirement is a minimum cash value. Because the lender faces almost no risk, you can typically score a lower rate than you would with a credit card or bank loan and the funds can be deposited into your account within a few days.

However, policy loans do come with a few disadvantages, starting with their effect on the face value of your permanent life insurance policy. During the repayment period, your coverage amount drops. If you die before repaying the loan, your loved ones will not receive the full death benefit of your policy.

Failure to repay the loan could also have other consequences. As interest accumulates, it will be added to your loan balance. Eventually, the outstanding balance could exceed the cash value of your policy, causing a lapse that leaves you without insurance coverage.

If your policy lapses during the repayment period, you could end up owing income tax on the amount borrowed. To avoid this, consider at least making regular interest payments. Be careful to keep up with your premium payments, too.

How Much Can You Borrow Against Your Life Insurance Policy?

The amount you can borrow against your life insurance policy depends on factors like how much cash value has accumulated and the policy’s terms and conditions. You can only borrow a significant amount if you have had your policy for a long time and regularly paid premiums.

It also depends on your insurer, as companies generally only allow you to borrow up to a certain percentage of the policy’s cash value. The amount you can borrow will be lower if you have any existing policy loans and interest has accumulated.

What Types of Life Insurance Policies Can You Borrow Against?

You can borrow against a permanent life policy with a cash value component, which includes whole life insurance, universal life insurance, variable life insurance and variable universal life insurance. These policy types differ regarding cash value accumulation and borrowing rules.

A whole life policy’s cash value grows over time and you can borrow against it. If you choose a universal life policy, the cash value will earn interest based on market trends or minimum interest rate.

The cash value of a variable life policy will likely grow quickly as it’s tied to investment options, but it’s generally riskier. A universal variable life policy is similar to a variable life policy regarding cash value accumulation but offers flexible premiums and death benefits.

How Soon Can You Borrow Against a Life Insurance Policy?

You can borrow against a life insurance policy only after a substantial cash value has built up, which generally takes several years. The timeframe will depend on your policy’s terms, premium amount and performance if it’s linked to investments. Your insurer might also set a minimum cash value requirement for borrowing.

We recommend you review your policy’s details and contact your insurance provider or financial advisor to understand when and how you can start borrowing.

What To Do Before Borrowing

Before you apply for a policy loan, make sure you fully understand your options and the terms of your policy. You may be able to verify some details by reading through your policy documents carefully. However, if you have questions or simply want to be sure, you can always contact your insurance agent.

Here’s a specific list of steps to take before borrowing from your policy:

  • Verify your policy type: Permanent policies generally have a cash value component, while term policies do not. If you have a term policy, you will not be able to borrow against it. However, you may want to consider converting your policy to whole life insurance to take advantage of this option in the future.
  • Look up the current cash value: Find out how much your policy is currently worth. You should be able to look this up yourself by logging into your life insurance company’s website or mobile app. If you cannot find it, you can call the company or your agent directly to request documentation.
  • Discuss the terms: Talk to your agent about how policy loans work with your specific insurer. Ask about the minimum cash value required and how much you can borrow. You can also ask about interest rates and any repayment terms.
  • Weigh the alternatives: Policy loans are not the only way to access your policy’s cash value. For instance, you may be able to make a withdrawal. This option will likely reduce your death benefit but does not require interest payments. You may also be able to use the cash value to cover your policy premiums. If you no longer need life insurance, ask your agent about the cash surrender value of your policy

In addition to discussing your options with your life insurance agent, you may want to speak with a financial advisor or estate planning attorney about the tax implications of a policy loan. In particular, ask them to walk you through what might happen if you cannot repay the loan. Consider the impact on your beneficiaries if you die before repaying the loan and the impact on your personal finances if you fall behind on insurance or premium payments.

Life Insurance Cost Calculator

Our Conclusion on How to Borrow Against Life Insurance

Taking out a life insurance policy loan could be a better option than using a credit card or applying for a personal loan to cover a large expense. However, it’s important to note that you can only borrow against your policy if you have a permanent policy with a cash value component, such as whole or universal life insurance. Term life policies do not qualify, as they do not have a cash value.

If your policy has adequate cash value, you can borrow against it with flexible repayment terms and low interest rates. Keep in mind that if you do not pay back the loan in full before you die, your death benefit will be reduced. Also, if your loan accrues interest to the point of exceeding your cash value, your policy could lapse.

Whether to borrow from your life insurance policy is a personal choice. Before deciding, we recommend that you discuss your needs and goals with a financial advisor or estate planning attorney. Make sure you fully understand the tax implications and potential impacts on your loved ones.

Frequently Asked Questions About Borrowing Against Life Insurance

No, you cannot immediately borrow against life insurance. You must wait until your policy’s cash value exceeds a certain threshold, and it can take several years to reach that point. The minimum cash value required for a policy loan varies by insurer.

How much money you can borrow from your life insurance policy depends on two things: the cash value of your policy and the limit set by your insurer. Expect to borrow no more than 90% of your policy’s current cash value, though the exact percentage allowed by your insurer may be lower than that.

It often takes five to 10 years to accumulate enough cash value to borrow against your life insurance policy. The exact length of time depends on the structure of your policy, including your premiums and rate of return. Once you have met the minimum cash value requirement, the loan approval process is typically quick and easy.

The interest rate on a life insurance loan can range from 5% to 8% but could be lower or higher depending on several factors. Policy loan interest rates are generally lower than the interest rates offered on personal loans. They may even compare favorably to home equity loan rates.

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How To Borrow Against Life Insurance (2024Guide) (10)

Saad ImranAuthor

Saad Imran is a personal finance writer with expertise in insurance, loans, credit cards and mortgages. When not writing, he’s a cat enthusiast who loves playtime with his furry companion.

How To Borrow Against Life Insurance (2024Guide) (11)

Tori AddisonEditor

Tori Addison is an editor who has worked in the digital marketing industry for over five years. Her experience includes communications and marketing work in the nonprofit, governmental and academic sectors. A journalist by trade, she started her career covering politics and news in New York’s Hudson Valley. Her work included coverage of local and state budgets, federal financial regulations and health care legislation.

How To Borrow Against Life Insurance (2024Guide) (2024)

FAQs

How to borrow from life insurance immediately? ›

Can you borrow against life insurance immediately? No, you cannot immediately borrow against life insurance. You must wait until your policy's cash value exceeds a certain threshold, and it can take several years to reach that point. The minimum cash value required for a policy loan varies by insurer.

Is it a good idea to borrow against your life insurance? ›

According to MarketWatch, interest rates on a life insurance loan typically range from 5% to 8%, much lower than the average rate for personal loans and credit cards. This is why borrowing against life insurance can be a relatively affordable option for policyholders who need a quick loan.

How much can I borrow out of my life insurance policy? ›

The amount you can borrow depends on the cash value of the policy. Typically, the insurer will let you borrow up to 90% of the cash value. However, in some cases, they might allow you to borrow up to 100% of the cash value. Check your policy and talk with your life insurance agent to determine how much you can borrow.

Can I really pull money from life insurance? ›

You can simply take money out of the cash value with a withdrawal. You can withdraw up to the amount you've paid in premiums without paying taxes on the funds. Withdrawals will reduce the death benefit.

What is the cash value of a $10000 life insurance policy? ›

The $10,000 refers to the face value of the policy, otherwise known as the death benefit, and does not represent the cash value of life insurance policy. A $10,000 term life insurance policy has no cash value.

Do you have to pay back life insurance loan? ›

You do not need to repay your life insurance loan, but there are risks associated with failing to do so. If you don't repay the loan before you die, the remaining balance will be deducted from the death benefit.

Does life insurance loan affect credit score? ›

Because there is no credit check, the loan won't affect your credit score. Plus, there are no restrictions on what the money from a policy loan can be used for. Interest rates on policy loans are often lower than on traditional loans.

How long does it take to build cash value on life insurance? ›

How long does it take to build cash value on life insurance? The length of time varies by insurer, but in most cases, cash value does not start to accrue until you have paid premiums for two to five years.

What happens when you borrow against a whole life policy? ›

The policy's cash value acts as collateral for the policy loan. If you never pay back the policy loan during your lifetime, the amount is deducted from the death benefit when you pass away—meaning that your beneficiaries will receive less and essentially repay the loan.

How much is a $1 million dollar life insurance policy? ›

Average cost of a million-dollar term life insurance policy
AgeTerm lengthAverage monthly rate
40Term length10 yearsAverage monthly rate$47.41
40Term length15 yearsAverage monthly rate$61.33
40Term length30 yearsAverage monthly rate$137.89
50Term length10 yearsAverage monthly rate$112.67
5 more rows

What is the cash value of a $25000 life insurance policy? ›

Examples of Cash Value Life Insurance

An example is a cash value life insurance policy with a $25,000 death benefit. Assuming you don't take out a loan or withdraw, the cash value accumulates to $5,000. After the policyholder's death, the insurance company would pay out the full death benefit, which would be $25,000.

How do I know if my life insurance has cash value? ›

You will typically find it listed separately in your life insurance statements. The net cash value will generally be lower than your total accumulated cash value for the first several years of coverage, as it's reduced by fees and surrender charges.

How much cash is a $100 000 life insurance policy worth? ›

How much can you sell a $100,000 life insurance policy for? On average, you can expect to receive 20% of the policy's face value when you sell it, according to the Life Insurance Settlement Association (LISA). That means a $100,000 life insurance policy might sell for $20,000. However, this is only an average.

Which life insurance can you borrow from? ›

You can borrow money against permanent life insurance policies that have cash value. Some types of permanent policies you can borrow from include whole life, universal life, and final expense insurance.

What is the interest rate on a life insurance loan? ›

Life insurance collateral loans typically have lower interest rates than you would get with a personal loan or credit card. While rates vary, they typically fall within the range of 6% to 8%, depending on the insurance company and your policy. Your cash value continues to earn interest during the loan.

How long does it take a life insurance policy to gain value? ›

How long does it take to build cash value in life insurance? Cash value typically doesn't accrue for the first two to five years of a policy's term. It can take decades for it to accumulate into a significant amount. Exactly how quickly the cash value grows depends on the type of policy.

How much is a million dollar life insurance policy? ›

Average cost of a million-dollar term life insurance policy
AgeTerm lengthAverage monthly rate
40Term length10 yearsAverage monthly rate$47.41
40Term length15 yearsAverage monthly rate$61.33
40Term length30 yearsAverage monthly rate$137.89
50Term length10 yearsAverage monthly rate$112.67
5 more rows

What is the cash value of a million dollar life insurance policy? ›

Step-by-Step: How Cash Value Grows
Whole Life, Fixed Death Benefit $1 Million Policy's Premium Allocation
Policy YearPolicyholder AgeAmount of Cash Value
125$0
3055$500,000
4065$750,000

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