How Can I Borrow Against My Life Insurance?

Borrowing against a life insurance policy provides access to funds by leveraging the policy’s accumulated cash value. Not all policies allow this; it is specific to those that build cash value over time. Understanding eligible policies and loan mechanics is important for anyone considering this option.

Understanding Policy Loans and Eligible Policies

Life insurance policies that accumulate cash value offer a savings component alongside the death benefit. A portion of each premium contributes to this cash value, which grows tax-deferred. Growth can occur through fixed interest rates, market-dependent rates with guaranteed minimums, or investment options, depending on the policy type.

Only permanent life insurance policies—such as whole life, universal life, variable universal life, and indexed universal life—build cash value and are eligible for policy loans. Term life insurance does not accumulate cash value and therefore does not allow policy loans. Permanent policies offer lifelong coverage as long as premiums are paid, making them distinct from term policies which expire after a set duration.

A policy loan is an advance from the insurer using your policy’s accumulated cash value as collateral; it is not a traditional bank loan or a withdrawal of your cash value. The policy remains in force, and the cash value continues to earn interest or dividends, though the loan itself accrues interest. Insurers typically limit the maximum loan amount to around 90% of the policy’s cash value.

The Process of Obtaining a Policy Loan

Obtaining a life insurance policy loan is a straightforward process, requiring no credit checks or lengthy approval. The policy’s cash value serves as collateral, making it a more accessible option compared to some traditional loans.

To initiate a policy loan, contact your insurance provider directly. This can be done through their customer service line, online portal, or by speaking with your policy agent. You will need to provide your policy number and specify the desired loan amount.

The insurer will process your request, which involves completing a loan application form. Processing times vary, but funds are disbursed within a few weeks, usually by direct deposit or check.

Implications of a Life Insurance Loan

Life insurance policy loans accrue interest, which can be fixed or variable, depending on policy terms. This interest is usually simple, calculated only on the principal loan amount. If interest is not paid, it is added to the outstanding loan balance, increasing the total amount owed.

Policy loans offer flexibility in repayment. There is usually no strict repayment schedule, allowing policyholders to repay the principal and interest over time, pay only the interest, or defer repayment indefinitely. However, any outstanding loan balance, including accrued interest, will reduce the death benefit paid to beneficiaries upon the insured’s death.

An outstanding loan impacts the policy’s cash value. If the loan balance, including accrued interest, grows to exceed the cash value, the policy can lapse. A policy lapse means coverage ends, and the policyholder loses insurance protection, which can lead to tax liabilities.

Loan proceeds are generally not considered taxable income. However, tax implications can arise if the policy lapses with an outstanding loan. If the policy terminates and the loan amount exceeds the premiums paid, the difference may be considered taxable income, as the IRS may view the unpaid loan as a distribution of policy gains.