Last updated: November 25th, 2022
Reviewed by
Paige Geisler
Licensed Insurance Agent
Table of Contents
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.
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.
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 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.
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.
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.
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.
Some benefits of borrowing from life insurance include:
Even though there are benefits to utilizing the life insurance policy loan option, these loans do have some disadvantages, such as:
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.
Brian is the founder and CEO of Insurist and carries Life, Health, and Property & Casualty licenses in all 50 U.S. states. Since 2013, Brian has been a member of Million Dollar Round Table, a designation for the top 1% of financial advisors worldwide. Brian has been featured in Yahoo! Finance, Money.com, Entrepreneur.com, Life Happens, Forbes, MSN, and Good Financial Cents. Brian’s goal is to show customers the best products, the quickest answers to their questions, and provide expert advice.
Paige is an assistant agent for State Farm and is licensed to sell property and casualty, health, and life insurance in Virginia. She handles all different types of insurance and financial services and is currently working on a securities and bonds license. Paige has a degree from Radford University in English and is a certified notary.
