Can You Borrow Against Life Insurance?

If you want to take out a loan but interest rates are prohibitively high, you might explore other lending opportunities. One potential source to consider is your life insurance. If you own a policy with cash value, you may be able to borrow against life insurance.

While you can’t take out a loan on your policy’s death benefit, you can borrow against your policy’s cash balance. These loans typically aren’t taxed as long as you repay them, and they offer a convenient source of funds when needed. However, life insurance loans can come with risks you should consider before borrowing from your policy.

Here’s how life insurance loans work and the related pros and cons, so you can decide whether this option is right for you.

Types of Life Insurance You Can Borrow From

Generally, any policy that accrues cash value will offer loan provisions in its contract terms. Term insurance, which provides a death benefit but doesn’t build a cash balance, doesn’t allow you to take out loans.

Common types of life insurance you can borrow from include:

Whole Life

Whole life policies remain in force for your entire life as long as you continue to pay the premiums. A portion of your premium is used to build a cash balance.

Variable Life

Variable life allows you to invest your cash balance. The investments’ performance impacts your cash balance’s growth.

Universal Life

Universal life policies accrue a cash balance over time and offer premium flexibility.

How Life Insurance Loans Work

You can borrow against life insurance once you’ve built a sufficient cash balance. Each contract will specify when loans are available, but you generally need to have a policy in force for several years for the cash balance to be large enough for a loan.

You don’t need a credit check, and you don’t need to follow a fixed repayment plan like other loans. You’re charged interest, and although it accrues, you aren’t required to pay it back. You can pay the loan back on any schedule you like or not at all. If you don’t repay your loan, the outstanding balance is subtracted from the death benefit your beneficiaries would receive when you pass.

Policy loans are normally processed quickly, and money is often deposited into your account within a few weeks.

Pros and Cons of Borrowing against Life Insurance

As with all financial decisions, borrowing against life insurance has pros and cons. Although the benefits of cash value life insurance loans make them appealing compared to other loans, carefully weigh the risks and possible downsides while considering your situation.

Pros

• You don’t have to worry about a credit check, and applying for a loan doesn’t affect your credit score.
• The policy itself serves as collateral for the loan. If you don’t repay the loan, your policy’s death benefit is the only thing at risk.
• The interest rates are typically lower than on a traditional loan.
• You can use the money any way you choose—there are no restrictions.

Cons

• If you have an outstanding policy loan when you pass, your beneficiary’s death benefit will be reduced.
• Interest accrues even if you don’t make payments, which increases the loan balance over time. Your policy may lapse if you allow the balance to grow too much. If that happens, you’ll no longer have life insurance coverage.
• The loan could become taxable if you fall behind and allow your policy to lapse. If you’re under 59½, you may also be subject to an additional 10 percent penalty.

How Loans Differ from Accelerated Death Benefits

Cash value loans and accelerated death benefits both allow you to access the value of your life insurance while you’re still alive, but they aren’t the same.

An accelerated death benefit is a special contract provision that allows you to receive a payout if you become chronically or terminally ill and are expected to pass within two years. It’s essentially an early payout of a portion of the death benefit that allows you to pay for care and treatment, and it’s generally not taxable.

Policy loans are a standard contract provision, but accelerated death benefits are typically added as a policy rider that may increase your premium.

Tapping Your Contract’s Cash Value

Loans from cash value life insurance policies can be a convenient way to access cash when you need it, but they aren’t without risk. Consider the potential advantages and drawbacks, and compare life insurance loans with other options before borrowing from your policy. If you could benefit from personalized guidance, don’t hesitate to reach out to a financial professional for assistance.

Insurers and their representatives are not permitted by law to offer tax or legal advice. The general and educational information here supports the sales, marketing or service of insurance policies. Based upon individuals’ particular circumstances and objectives, they should seek specific advice from their own qualified and duly-licensed independent tax or legal advisors.

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