How Can You Borrow Money From Your Life Insurance?

Life insurance policies can serve a purpose beyond providing a death benefit. Certain types of policies offer a feature that allows policyholders to access funds during their lifetime, known as a life insurance policy loan. This enables individuals to borrow money using the policy’s accumulated value. Understanding how these loans function is important for those considering this option.

Understanding Cash Value Life Insurance

Cash value refers to the savings component that accumulates within certain types of life insurance policies, representing a portion of the premiums paid. Only permanent life insurance policies, such as whole life, universal life, variable universal life, and indexed universal life, are designed to build cash value. Term life insurance, in contrast, provides coverage for a specific period and does not accumulate this accessible value. The cash value typically grows through a combination of premium allocations and interest or investment returns, with fees subtracted. It generally takes several years, often two to five, for a policy to accumulate sufficient cash value to be a meaningful source for a loan.

How Policy Loans Work

Unlike traditional bank loans, a policy loan is essentially borrowing from the insurance company, with the policy’s cash value serving as collateral. This means no credit check, income verification, or formal approval process is involved, as the policyholder accesses their own policy’s value. The policy remains in force as long as premiums are paid and sufficient cash value exists to cover loan interest. Interest accrues on the loan balance, and this interest is typically added to the outstanding loan amount if not paid. Repayment of a policy loan is highly flexible; there is no fixed repayment schedule, and policyholders can choose to repay the loan in a lump sum, in installments, or not at all. Even with an outstanding loan, the cash value of the policy may continue to grow, which is a unique characteristic compared to other forms of borrowing where the collateral is typically inaccessible.

Steps to Borrow from Your Policy

Initiating a loan from a life insurance policy with cash value is a straightforward process. The first step involves contacting the insurance company, either through customer service, an agent, or via an online policyholder portal. Policyholders will need to inquire about the available loan amount, which is typically a percentage of the cash value, often up to 90% or 95%. Once the desired loan amount is determined, the policyholder will typically complete a loan request. While some insurers may require a specific form, many allow requests online or over the phone, requiring information such as the policy number, the requested loan amount, and the preferred disbursement method. The processing time for these loans is generally quick, often taking about one week to receive the funds.

Managing Your Policy Loan

After a policy loan is taken, it has ongoing implications for the life insurance policy. Any outstanding loan balance, including accrued interest, will reduce the death benefit payable to beneficiaries. For instance, if a policy has a $250,000 death benefit and a $50,000 outstanding loan, the beneficiaries would receive $200,000. If unpaid interest causes the loan balance to grow and eventually exceed the policy’s cash value, the policy may lapse, leading to a loss of coverage. Policyholders have the option to repay the loan at any time, and repayment helps restore the policy’s full cash value and death benefit. Loan payments are usually applied first to interest and then to the principal. While there is no mandatory repayment schedule, monitoring the loan balance is important to prevent it from eroding the policy’s benefits or causing a lapse.