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How to Borrow Money from a Life Insurance Policy

You can borrow from permanent (not term) life insurance coverage, but there are pros and cons to consider.

Written by Erin Gobler / September 15, 2022

Quick Bites

  • It’s possible to borrow against whole, universal or variable permanent life insurance.
  • Life insurance loans typically have lenient application requirements and relatively low interest rates.
  • However, failing to replenish your policy’s cash value could mean lapsed coverage and a big income tax bill.

Permanent life insurance is an attractive option for many consumers. Not only does it provide life insurance coverage for your entire life, but it also builds a cash value that you can use later in life.

You can also borrow from your life insurance policy, which is known as a life insurance loan. These loans can help you get cash when you need it. Sort of like an emergency fund, you hope to never have to use it, but it’s always there to fall back on if necessary.

“It may be more advantageous to borrow from your own life insurance policy than from your local bank,” says John Graves, the founder and managing partner of G&H Financial Group.

If you’re considering borrowing from your life insurance policy, there’s a lot you should understand upfront. Let’s review the types of life insurance policies you can borrow against, how you can borrow from your policy, and some of the key risks involved.

Inside this article

  1. Types of life insurance loans
  2. How to borrow via life insurance
  3. Risks of life insurance loans
  4. Taxes on life insurance loans
  5. Example of borrowing
  6. Frequently asked questions

Types of life insurance you can borrow against

When you have a term life insurance policy, it simply guarantees a death benefit if you pass away during the policy term, nothing more.

“There is typically no available cash value in term life, accidental death and funeral life policies, so borrowing from these would not be possible,” says Graves.

But in the case of permanent life insurance, you have both the death benefit, as well as a cash value. The cash value builds as you pay your premiums and it has time to grow in the market. Your cash value serves as collateral for the loan. Types of permanent life insurance policies that you can borrow against include:

How to borrow money from your life insurance

The process of borrowing from your life insurance policy is fairly easy. In most cases, you can simply call up your insurance company and request the loan. In other cases, you may be able to complete the entire process online. Once you’ve completed the forms, you could have the funds in as little as a few days.

One of the benefits of borrowing from your life insurance policy instead of a traditional lender is this simplicity.

“There are no lending requirements and no restrictions on the use of funds,” says Graves.

First, you’ll often have access to better interest rates on a life insurance policy than you would on a bank loan.[1] Additionally, your loan eligibility is based on your life insurance cash value rather than your creditworthiness, meaning the money is more accessible, particularly if you have a spotty credit history.[2]

Risks of borrowing money from your life insurance policy

It’s easy to see why life insurance loans are such an attractive option, thanks to their competitive interest rates and lack of borrowing requirements. However, there are also some important risks that borrowers should be aware of.

First, borrowing against your life insurance money means there could be less available for your family if you pass away. Ideally, you would repay the loan within your lifetime, but that’s not always the case. And if you haven’t repaid the loan, it will be deducted from your death benefit.

It’s also worth noting that, even with fewer borrowing requirements, there are still some restrictions on life insurance loans. For example, you generally must have a minimum amount of cash value built up, meaning you won’t be able to borrow early on. You’re also usually limited to a certain percentage—often 90%—of your cash value balance.

Another potential risk of borrowing against life insurance is what happens if you don’t repay the loan. While the rates on life insurance loans are often more competitive than personal loans, they do accrue interest. And if the interest accrues at a faster rate than you repay the loan, your policy could lapse. Not only would this result in you not having coverage, but there could also be tax implications.[2]

Pros

  • Easier to qualify for than other loan types
  • Lower rates than other financing options
  • Good credit isn’t necessary

Cons

  • Diminishes your death benefit (if you pass before repaying the loan)
  • Must meet policy’s minimum cash value requirement
  • Borrowing amount is limited to set percentage of policy’s cash value
  • Failing to repay the loan could mean losing coverage and facing a bigger tax bill

What Is an Accelerated Death Benefit?

What Is an Accelerated Death Benefit?

An accelerated death benefit is a life insurance policy provision in which you can get your death benefit while alive to pay for medical care.

Find out more

What about taxes on life insurance loans?

As we mentioned, there could be tax implications to borrowing against your life insurance policy. As long as you repay the loan, there are no tax implications. This is good news since the tax benefits of these policies are one of the reasons people enjoy them. But if you fail to repay the loan and your policy lapses, you’ll end up paying taxes on it.[2]

“Life insurance loans are distributed without tax liability and are tax-free, as long as the policy is still in force,” Graves said. “If you lapse the policy the entire loan amount gets treated as income.”

Example of borrowing against life insurance

Suppose you have a universal life insurance policy and have built up a cash value of $50,000. Unfortunately, you’re hit with some unplanned home repairs, and without other money set aside, borrowing against your life insurance policy is your best option.

Your insurance company allows you to borrow up to 90% of your cash value amount, meaning you can take a life insurance loan of $45,000. Unlike other loans, life insurance loans don’t have a set repayment schedule. As a result, you can pay it back on a schedule that works for you— or even decide not to repay it at all.[3] (Though letting your policy lapse would mean surrendering your coverage and facing a larger income tax bill.)

As long as you have an outstanding balance on your loan, your policy death benefit will be reduced, and if you die before repaying the loan, your beneficiaries will receive less money. However, as you repay the loan, your death benefit increases.

Using Life Insurance While Alive

Using Life Insurance While Alive

Life insurance is meant to be a boon to your family when you die, but there are some benefits you can tap into your policy sooner if necessary.

Find out more

Frequently asked questions

How much can I borrow from my life insurance policy?

The amount you can borrow from your life insurance policy depends on the amount of cash value you’ve built up and your policy terms. Insurers generally allow you to borrow up to 90% of your cash value amount.

Do I have to pay back loans on life insurance?
Does a life insurance loan affect my credit score?
What is the interest rate on a life insurance loan?
Article Sources
  1. Shelly Gigante, “Life insurance: Treat cash value with care,” MassMutual, July 18, 2022, https://blog.massmutual.com/post/life-insurance-treat-cash-value-with-care.
  2. “Pros and cons of life insurance loans,” Progressive, https://www.progressive.com/answers/life-insurance-loans/.
  3. “Life insurance policy loans: What you need to know,” Protective, https://www.protective.com/learn/life-insurance-policy-loans.

About the Authors

Erin Gobler

Erin Gobler

Erin is a personal finance expert and journalist who has been writing online for nearly a decade. Erin’s work has appeared in major financial publications, including Fox Business, Time, Credit Karma, and more.

Full bio

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