How Can I Borrow Against My Life Insurance Policy?

Borrowing against a life insurance policy offers policyholders a way to access funds accumulated within their policy. This mechanism leverages the policy’s cash value. Understanding how this process works, from eligibility to repayment, is important for anyone considering it as a financial tool. It allows utilization of policy benefits during one’s lifetime without terminating coverage.

Understanding Policy Loans

A life insurance policy loan is an advance against the accumulated cash value of a permanent life insurance policy. This is not a traditional loan from a bank or credit institution. The insurance company provides the loan, using the policy’s cash value as collateral. The policy’s cash value can continue earning interest or investment gains even while a loan is outstanding.

Only permanent life insurance policies, such as whole life, universal life, variable universal life, and indexed universal life, are eligible for these loans because they include a cash value component. Term life insurance policies, which do not build cash value, cannot be borrowed against. Interest accrues on these policy loans, with rates often ranging from 5% to 8%. These rates can be lower than personal loans or credit cards.

Determining Your Borrowing Capacity

The amount a policyholder can borrow is directly linked to the policy’s accumulated cash value. Insurers typically set a maximum loan amount, commonly up to 90% or 95% of the policy’s cash value. This limit may be reduced by any existing policy loans or applicable surrender charges. The specific type of permanent life insurance policy held, the duration the policy has been in force, and the individual insurer’s rules all influence the exact borrowing limit.

Newer policies often require several years to build sufficient cash value for a meaningful loan. For instance, it might take two to ten years or more for the cash value to reach a level adequate for a substantial loan. Policyholders can ascertain their current cash value and potential borrowing limit by contacting their insurance provider directly, reviewing policy statements, or accessing online portals.

Steps to Obtain a Policy Loan

Obtaining a policy loan is a straightforward process, often without the extensive credit checks or income verification of traditional bank loans. The first step is to contact your life insurance company, which can typically be done via phone, through their online portal, or by mail. Many insurers allow loan requests online.

You will usually be guided through the process, which may involve requesting a loan application form or simply providing the desired loan amount. While some insurers may require a formal application form, many now allow for a more streamlined request process. The information typically required includes the policy number and the requested loan amount. After the request is submitted, the processing time usually ranges from a few days to a couple of weeks, with funds often disbursed via direct deposit or check.

Managing Your Policy Loan

After a policy loan is disbursed, repayment terms offer flexibility, as there is no fixed repayment schedule. Policyholders can make regular payments, pay a lump sum, or allow the interest to capitalize, which means the unpaid interest is added to the outstanding loan balance. Interest continues to accrue as long as the loan remains outstanding.

Failing to repay the loan, including accrued interest, has direct consequences. The outstanding loan balance reduces the policy’s death benefit. If the outstanding loan balance, including capitalized interest, exceeds the policy’s cash value, the policy can lapse. A policy lapse can lead to adverse tax implications, as any loan amount exceeding the premiums paid into the policy may become taxable income.