Quick answer
You can borrow against the cash value of any permanent life insurance policy (whole life, universal life, indexed universal life, variable universal life) up to about 90 percent of the accumulated cash value. The loan rate is set by the policy contract and typically runs 4 to 8 percent annually. Loans require no application, no credit check, and no scheduled repayment. The loan is NOT taxable as long as the policy stays in force. The major risk is that if the loan balance plus accrued interest exceeds the cash value and the policy lapses, the loan amount above your cost basis becomes taxable as ordinary income in the year of lapse. Term life insurance has no cash value and cannot be borrowed against.
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.
Frequently Asked Questions
Can you borrow against a life insurance policy?
Yes, but only against permanent life insurance policies (whole life, universal life, indexed universal life, variable universal life) that have accumulated cash value. Term life insurance has no cash value and cannot be borrowed against. Most carriers allow loans up to 90 percent of accumulated cash value, payable as a lump sum within 5 to 10 business days of request. No application, no credit check, no scheduled repayment - the loan accrues interest at the policy loan rate (typically 4 to 8 percent) and the interest is added to the loan balance.
How much can I borrow against my life insurance policy?
Most carriers allow loans up to 90 percent of the policys accumulated cash value. A policy with $50,000 in cash value typically supports a loan of about $45,000. The cap protects the carrier against the loan balance exceeding the cash value if interest accrues unpaid for many years. Some carriers offer a higher cap (95 percent at Mass Mutual, 100 percent at New York Life on some products) but the standard is 90 percent. The first cash value typically appears in years 2 to 4 of a whole life policy; universal life and IUL policies usually take 5 to 10 years to build meaningful cash value.
What is the interest rate on a life insurance policy loan?
Most carriers charge a policy loan rate of 4 to 8 percent annually, set by the policy contract at issue. Some products use a variable loan rate tied to Moodys Corporate Bond Index, while others use a fixed loan rate. Indexed universal life and variable universal life policies often offer a Wash Loan provision where the loan rate equals the policy crediting rate - making the net cost of the loan approximately zero. Always read the loan provisions in your policy contract before borrowing; loan rates vary significantly between carriers and between policy series within the same carrier.
Do I have to pay back a life insurance loan?
No, there is no required repayment schedule on a life insurance policy loan. You can pay it back on any schedule you choose, including never. The trade-off is that interest continues to accrue on the unpaid balance and the death benefit is reduced dollar-for-dollar by the outstanding loan plus interest at the time of your death. The other risk is that if the loan plus accrued interest ever exceeds the cash value, the carrier will issue a notice and the policy will lapse - at which point the loan amount above your cost basis becomes taxable as ordinary income in the year of lapse.
Is a life insurance policy loan taxable?
No, as long as the policy stays in force. The IRS treats a policy loan as a debt rather than a taxable distribution because the carrier holds the cash value as collateral. The exception is if the policy lapses with a loan balance: at lapse, the loan amount above your cost basis (total premiums paid into the policy) becomes taxable as ordinary income in the year of lapse. This is one of the most common life-insurance tax surprises - many policyholders take large loans in their 60s and 70s, the policy lapses in their 80s, and they receive an unexpected tax bill on the gain portion.
Does a life insurance loan reduce the death benefit?
Yes. Any outstanding policy loan plus accrued interest is subtracted from the death benefit paid to your beneficiary. A policy with a $500,000 death benefit and a $40,000 outstanding loan with $3,000 in accrued interest would pay $457,000 to the beneficiary at the insureds death. To preserve the full death benefit, the policyholder must repay the loan in full plus interest before death; otherwise, the beneficiary receives the face amount minus the loan balance.
Can I borrow from a term life insurance policy?
No. Term life insurance is pure death-benefit coverage with no cash value component - there is nothing to borrow against. Only permanent policies (whole life, universal life, indexed universal life, variable universal life) build cash value over time and can be borrowed against. If you currently have a term policy and want access to cash-value borrowing, you would need to either convert the term policy to a permanent policy (most term policies include a Conversion Option exercisable within the first 10 to 20 years) or purchase a new permanent policy separately.
How long does it take to build cash value in a life insurance policy?
It depends on the policy type. Whole life insurance builds cash value most predictably - typically 1 to 3 percent of premium in years 1 to 2, ramping to a guaranteed schedule by years 5 to 10. Universal life and indexed universal life build cash value more slowly in the early years because more of the early premium covers mortality and expense charges, but they can outperform whole life in later years. A typical $500,000 whole life policy with $400 monthly premium builds about $5,000 to $8,000 in cash value by year 5, $25,000 to $35,000 by year 10, and $80,000 to $130,000 by year 20.
Is a life insurance loan better than a personal loan or credit card?
Often yes, for short-term borrowing needs. A life insurance loan typically charges 4 to 8 percent annually with no credit check, no application, and no required repayment. A personal loan typically charges 7 to 20 percent annually based on credit score with a fixed 3- to 7-year repayment schedule. A credit card typically charges 18 to 30 percent annually. The risks of a life insurance loan are: (1) the loan reduces the death benefit if unpaid at death, (2) the loan can cause policy lapse and a tax bill if unpaid for many years, and (3) the borrowed cash value loses its tax-deferred growth potential while it is out of the policy.
Can I use a life insurance loan to buy a house?
Yes. Policy loans can be used for any purpose - the carrier does not ask what the loan is for. Common uses include down payments on a home, business capital, education costs, medical expenses, and emergency cash. The advantages over a traditional mortgage or HELOC: no credit check, no application, no closing costs, and funds typically delivered within 5 to 10 business days. The drawbacks: policy loans rarely supply enough cash for a full home purchase (most policies have $50,000 to $200,000 in accessible cash value, not the $400,000+ that most home purchases require), and the loan reduces the death benefit dollar-for-dollar until repaid.
