Can You Get a Loan From Your Life Insurance?

A life insurance policy loan offers a way for policyholders to access funds from their permanent life insurance coverage. This involves borrowing money directly from the insurer, utilizing the policy’s accumulated cash value as collateral. This is a loan against the policy’s value, not a direct withdrawal of the cash itself, ensuring the policy generally remains in force.

Understanding Cash Value Life Insurance

Cash value represents a component within certain types of permanent life insurance policies that grows over time. A portion of each premium payment contributes to this cash value, alongside the amount allocated for the death benefit and administrative costs. This accumulated cash value earns interest on a tax-deferred basis, meaning earnings are not taxed until withdrawn.

Policies that build cash value include whole life, universal life, variable universal life, and indexed universal life insurance. Whole life insurance offers guaranteed cash value growth at a fixed rate and consistent premiums. Universal life policies provide flexibility in premiums and death benefits, with cash value growth often tied to current interest rates. Variable universal life and indexed universal life policies link cash value growth to investment performance, offering potential for higher returns but also greater risk.

How Life Insurance Loans Function

A life insurance loan operates by the insurer lending money to the policyholder, with the policy’s cash value serving as collateral. The policyholder typically does not need a credit check for this loan, as the cash value provides security.

Interest is charged on the loan, which accrues over time and can compound. Interest rates may be fixed or variable, commonly ranging between 5% and 8%. Policy loans generally do not have a mandatory repayment schedule; however, interest must be paid to prevent the loan balance from increasing. An outstanding loan amount reduces the policy’s available cash value. If the accumulated loan balance, including accrued interest, exceeds the policy’s cash value, the policy can lapse.

Requesting a Policy Loan

Initiating a policy loan typically involves contacting the life insurance company directly. Policyholders can reach out via phone, through an online portal, or by consulting with their financial advisor or insurance agent. The insurer will guide them through the necessary steps.

The insurer will require the policy number and the desired loan amount. The process usually involves completing a loan request form. Loan funds are often disbursed through direct deposit or a check. Sufficient cash value must have accumulated in the policy, which can take several years, before a meaningful loan amount is available.

Tax and Policy Adjustments

An outstanding policy loan directly impacts the death benefit. Any unpaid loan balance, along with accrued interest, will be deducted from the death benefit paid to beneficiaries upon the policyholder’s death. This reduction can diminish the financial protection intended for loved ones.

The cash value used as collateral for a loan may not continue to earn interest or dividends at the same rate as the unencumbered cash value. This can slow the overall growth of the policy’s cash value. If a policy lapses, such as when the loan balance plus interest exceeds the cash value, the outstanding loan amount can become taxable income to the policyholder. Policyholders have the option to repay the loan, which helps restore the policy’s full cash value and death benefit.