Can You Borrow From a Life Insurance Policy?

A life insurance policy loan provides an avenue to access funds from a permanent life insurance policy. It functions as an advance taken against the policy’s accumulated cash value, which serves as collateral for the loan. This financial mechanism is a common feature, offering policyholders a way to utilize their policy’s value during their lifetime.

Types of Policies Allowing Loans

To obtain a life insurance loan, the policy must have accumulated cash value, which is found in permanent policies like Whole Life, Universal Life, Variable Universal Life, and Indexed Universal Life. A portion of each premium payment is allocated to a savings component, growing tax-deferred. Whole Life policies often offer a guaranteed rate of return on this cash value, while Universal Life policies provide flexibility in premiums and death benefits, with cash value growth tied to interest rates. Variable Universal Life and Indexed Universal Life policies link cash value growth to investment performance or market indices, introducing more variability. Term life insurance does not build cash value, so it does not allow for policy loans.

How Policy Loans Operate

A life insurance policy loan is an advance from the insurer, using the policy’s cash value as collateral, rather than a withdrawal of the cash value itself. This allows the cash value to continue growing and potentially earning interest or investment gains even while the loan is outstanding. Interest accrues on the loan balance, typically ranging from 5% to 8%, though rates can vary by insurer and policy. There is no fixed repayment schedule, credit check, or income verification required, as the policy secures the loan. Any outstanding loan balance and accrued interest directly reduce the policy’s death benefit, and tax implications can arise if the policy lapses with an unpaid loan.

Steps to Request a Policy Loan

Before requesting a loan, policyholders should identify their policy number and the current available loan amount, which is accessible through the insurer’s online portal or customer service. Checking the cash value ensures eligibility and helps determine the maximum borrowable amount, often up to 90% of the policy’s cash value. Once information is gathered, the policyholder can contact their insurer to request the loan, which can be done via phone, online portal, or mail. The insurer may require specific forms to formalize the request. After submission, processing times typically range from a few business days to a week, with funds disbursed through direct deposit or check.

Loan Repayment and Policy Impact

Policyholders have options for repaying a life insurance loan, such as making a lump-sum payment, partial payments, or no payments. Interest continues to accrue on the outstanding loan balance; if not paid, it will be added to the principal, increasing the total amount owed and significantly impacting the policy over time. An outstanding loan reduces the policy’s death benefit; if the policyholder passes away with an unpaid loan and accrued interest, that amount is subtracted from the death benefit. If the outstanding loan balance, including accrued interest, grows to exceed the policy’s cash value, the policy may lapse. Should the policy lapse with an outstanding loan, the loan amount (up to the policy’s basis) can become taxable income, potentially creating an unexpected tax liability.