Can You Borrow From a Life Insurance Policy?

In the face of financial hardship, borrowing money from a life insurance policy may be a solution. Understanding how life insurance loans work is the first step in deciding whether this option is for you.
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Can You Borrow From a Life Insurance Policy?

Written by Brian Greenberg
CEO / Founder & Licensed Insurance Agent

Last updated: November 25th, 2022

Reviewed by Paige Geisler
Licensed Insurance Agent

Can You Borrow Money From a Life Insurance Policy?

You can borrow money from certain types of life insurance policies. Whether you can borrow money from your policy depends on its type and value.

What Types of Life Insurance Policies Can You Borrow Against?

Life insurance companies only grant loans on policies that have cash value. Because term life insurance doesn’t accumulate any cash value, you can only borrow from a permanent policy, such as whole life or universal life.

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How Soon Can You Borrow Against a Life Insurance Policy After Getting a New Policy?

Even if you have a permanent life insurance policy, the accumulated cash value won’t be enough to borrow against immediately after purchase. You will likely need to make regular premium payments on your policy for several years before it accumulates enough value to borrow against.

Each time you pay a premium, a portion is invested by the insurance company. Insurers pay interest and dividends on the money they invest, but for many types of permanent life insurance, the rates are low. This means the cash value often grows slowly.

Life insurance products that pay high rates of interest are available. However, these policies usually involve investing in accounts linked to the stock market, such as annuities. Your death benefit isn’t guaranteed with these policies, and you could potentially lose money when investments underperform.

How Much Money Can You Borrow From a Life Insurance Policy?

How much you can borrow from a life insurance policy depends on the total cash value. Most insurance companies place caps on the maximum amount you can borrow. Generally, insurers will lend you up to 90% of the current cash value at the time of the loan application. For example, if the cash value of your policy is $100,000, you could borrow up to $90,000.

How Does a Life Insurance Loan Work?

With a life insurance loan, the insurance company pays you a lump sum. You may receive a check or get the money electronically deposited into a bank account. In exchange for the loan, you agree to pay back the amount owed plus interest.

When you make loan payments, a portion covers accrued interest and the rest goes to pay back the loan. If you pass away before you pay off the loan in full, the insurance company will subtract the balance owed, including interest, from the death benefit.

How Long Do You Have to Pay Back a Life Insurance Loan?

Typically, insurance companies don’t require you to pay back the loan within a specific time frame, and some may not require you to ever make a payment. However, you should still strive to repay the loan while you’re alive.

If you fail to make payments, the interest added to the loan each month could raise the balance above the cash value. When this happens, insurance companies may cancel the policy or place it in a lapsed status until the loan is paid down. In the event of a cancellation, you still need to repay the loan, but you would lose your death benefit and the policy’s cash value.

What Are the Benefits and Drawbacks of Borrowing From Life Insurance?

There are benefits and drawbacks to borrowing from life insurance that you should be aware of before you take out a loan. Weighing these pros and cons carefully can help you make the best decision.

Life Insurance Loan Pros

Some benefits of borrowing from life insurance include:

  • Quick access to funds: Typically, life insurance policies can process loan requests in just a few days, giving you quick access to money in an emergency.
  • Simplified underwriting process: Because the cash value of your life insurance policy serves as collateral, insurers typically don’t take your credit score or income into consideration when underwriting loans.
  • Low-interest rates: Interest rates on life insurance loans are usually lower than those for unsecured personal loans, payday loans, and many credit cards.
  • Flexible repayment options: Normally, you can make payments on a schedule that works for you. You can choose how much you pay each month or if you make a payment at all.

Life Insurance Loan Cons

Even though there are benefits to utilizing the life insurance policy loan option, these loans do have some disadvantages, such as:

  • Possible reduction in death benefit: If you die before you pay off the loan, your beneficiaries could receive less money than the face value of the policy you purchased. This means they will have less to replace your income, settle debts, or use for funeral expenses.
  • Loss of guarantee: Some permanent life insurance policies have a guaranteed cash value. Taking out a policy loan may cancel or change the amount of this guarantee.
  • Fees: In some cases, insurance policies may maintain the guarantee of permanent life insurance or not reduce the death benefit if you pay a sizable fee. Additional processing fees can also be associated with the loan or withdrawal of funds.
  • Risk of policy cancellation: As previously mentioned, if you choose not to make payments and the loan balance plus interest exceeds the cash value, the insurer may cancel the policy or place it in a lapsed status.
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Key Takeaways About Borrowing From a Life Insurance Policy

If you have a permanent life insurance policy with sufficient cash value, a life insurance loan could give you access to money to cover emergency expenses, make a major purchase, or replace income lost due to a layoff or illness. Before taking out a life insurance loan, make sure you understand the terms and conditions outlined in your life insurance policy contract. Be aware of any fees and how any unpaid loan balance will impact the size of the death benefit your family receives.

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