Can I Borrow From My Term Life Insurance?

Life insurance serves as a fundamental component of financial planning for many individuals and families. As policyholders navigate their financial journeys, questions often arise regarding the accessibility of funds within these policies. Understanding whether and how one can access financial resources from a life insurance policy is a common inquiry.

Characteristics of Term Life Insurance

Term life insurance provides a death benefit for a specific, predetermined period, typically 10 to 30 years. It is considered pure protection because it does not accumulate cash value over time.

Since there is no savings or investment component that builds value, it is not possible to borrow against a term life insurance policy. If the policyholder outlives the term, the coverage typically ends, and no funds are paid out unless the policy is renewed or converted.

Life Insurance Policies with Borrowing Options

In contrast to term life, permanent life insurance policies, such as whole life and universal life, include a cash value component. This cash value grows over time on a tax-deferred basis, functioning as a savings or investment element within the policy. The accumulation of this cash value enables policyholders to access funds while still living.

The cash value can be accessed through policy loans or withdrawals. Whole life policies offer guaranteed cash value growth at a fixed interest rate, while universal life policies provide more flexibility with premiums and death benefits, and their cash value growth may vary. It generally takes several years for sufficient cash value to accumulate before borrowing becomes a viable option.

Understanding Life Insurance Loans

Borrowing against a permanent life insurance policy’s cash value involves taking a loan from the insurer, collateralized by the policy’s accumulated cash. This loan is an advance where the cash value serves as security, not a withdrawal of your own money. These loans are typically interest-bearing, with rates often competitive, ranging between 5% and 8%.

Repayment schedules for policy loans are often flexible, allowing policyholders to repay at their own pace or choose not to repay the principal. However, unpaid interest accrues and can increase the outstanding loan balance. If the loan balance, including accrued interest, grows to exceed the policy’s cash value, the policy could lapse, leading to the termination of coverage. If a policy lapses with an outstanding loan, the loan amount exceeding the premiums paid can become a taxable event. Any outstanding loan balance, including interest, will reduce the death benefit paid to beneficiaries.