Can I Borrow Against My Term Life Insurance?

Life insurance serves as a financial safeguard, offering a death benefit to beneficiaries upon the policyholder’s passing. Many individuals consider their life insurance policy a potential source of funds during their lifetime, leading to questions about borrowing against it. The ability to access funds from a life insurance policy hinges on the specific type of coverage held. Understanding the different structures of life insurance is important for determining if a policy can serve as a financial resource.

The Nature of Term Life Insurance and Cash Value

Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years, and is designed purely for death benefit protection. This type of policy pays out if the insured dies within the specified term. Term life insurance does not build a cash value component over time. It is a cost-effective option for individuals seeking substantial coverage for a defined period.

Because term life insurance lacks a cash value, it cannot be borrowed against. There is no savings or investment element within the policy to serve as collateral for a loan. Premiums cover the cost of insurance for the given period, with no portion allocated to a growing fund. Its primary function remains providing a financial safety net for beneficiaries during the policy term.

Life Insurance Policies That Accumulate Cash Value

Unlike term life insurance, permanent life insurance policies provide coverage for an individual’s entire life and include a cash value component. This cash value is a savings or investment feature that grows on a tax-deferred basis. As premiums are paid, a portion contributes to this cash value, which policyholders can access.

Common types of permanent life insurance that accumulate cash value include whole life and universal life policies. Whole life insurance offers guaranteed cash value growth and a fixed premium. Universal life policies provide flexibility in premiums and death benefits, and also build cash value, though its growth may vary depending on the policy structure.

How Life Insurance Policy Loans Work

Policy loans allow policyholders to borrow money using their permanent life insurance policy’s cash value as collateral. The loan is issued by the insurance company, not from the cash value itself, meaning the cash value continues to grow within the policy. Policyholders can typically borrow up to 90% of their accumulated cash value. This access to funds comes without a credit check or a stringent application process, as the policy itself serves as collateral.

Interest is charged on policy loans, with rates typically ranging from 5% to 8% annually. Repayment terms are flexible, allowing policyholders to repay the loan at their own pace or not at all. However, any outstanding loan balance, along with accrued interest, will reduce the death benefit paid to beneficiaries. If the loan balance and accrued interest exceed the cash value, the policy can lapse, which may lead to the outstanding loan amount being treated as taxable income.

Options for Term Life Policyholders Needing Funds

Individuals with term life insurance generally cannot borrow against their policies due to the absence of cash value. However, some term life policies offer a conversion option, allowing the policyholder to switch to a permanent life insurance policy. This conversion typically does not require a new medical exam, making it an attractive option for those whose health has changed. Converting to a permanent policy allows for future cash value accumulation, which could eventually be borrowed against.

For immediate financial needs, term life policyholders may explore other personal finance avenues. These include securing personal loans from financial institutions or utilizing home equity loans. Drawing upon existing savings or investment accounts also remains a common approach for accessing funds. Its affordability allows policyholders to allocate funds saved on premiums to other financial instruments that can provide liquidity.