Can You Borrow From Term Life Insurance?

It is a common question whether one can borrow from a term life insurance policy. While certain types of life insurance policies allow policyholders to access funds through loans or withdrawals, term life insurance does not offer this feature. Understanding the differences between various life insurance products clarifies why borrowing is not an option with term life policies.

What Term Life Insurance Covers

Term life insurance provides financial protection for a specific period. This period can range from a few years, such as 10, 20, or 30 years, or extend to a specific age. If the insured person dies within this defined term, the insurance company pays a death benefit to the designated beneficiaries. This payout helps beneficiaries cover financial obligations like mortgages, education costs, or daily living expenses.

The primary purpose of term life insurance is to offer death benefit coverage. It is designed to ensure financial support for loved ones if an unexpected death occurs during the policy’s active period. Premiums for term life insurance are more affordable compared to other types of life insurance because the coverage is temporary and does not include a savings or investment component. If the policyholder outlives the term, the coverage expires, and no benefit is paid.

How Cash Value Works

Cash value is a component found within certain types of permanent life insurance policies, such as whole life or universal life insurance. This feature allows a portion of the premiums paid to accumulate over time in a savings or investment account within the policy. As payments are made, the cash value grows on a tax-deferred basis, similar to how funds grow in retirement accounts.

This accumulated cash value can be accessed by the policyholder during their lifetime. Policyholders can borrow against this cash value or make withdrawals. The cash value serves as collateral for any loans taken from the policy, meaning the loan is secured by the policy’s own accumulated funds. This provides a source of funds that can be used for various financial needs.

Why Term Life Policies Do Not Offer Loans

The inability to borrow from a term life insurance policy stems from its design: it does not accumulate cash value. Term life insurance is structured to provide a death benefit for a specified period. Unlike permanent life insurance policies that build a savings component, term policies do not have an internal fund from which money can be borrowed.

Because there is no cash value account within a term life policy, there is no asset against which a loan can be secured. When a loan is taken from a permanent life insurance policy, it is borrowing against the policy’s own accumulated funds. This mechanism does not exist in term life insurance, as premiums are used only to cover the cost of the death benefit for the term. Term life insurance cannot serve as a source for policy loans.

Alternative Ways to Access Funds

When a life insurance policy loan is not an option, individuals have several other financial avenues for accessing funds. Personal loans from banks or credit unions are a choice, offering a lump sum of money repaid over a set period with interest. Interest rates and terms for personal loans vary depending on the borrower’s creditworthiness and the lender.

Home equity loans or lines of credit, secured by the value of one’s home, can provide access to larger sums at lower interest rates compared to unsecured loans. These options carry the risk of collateralizing a primary asset. Utilizing existing emergency savings or exploring credit card cash advances, though often with higher interest rates, can also provide immediate liquidity. Careful consideration of terms and costs is important for each alternative.