How Long Do You Have to Have Life Insurance to Borrow Money?

A life insurance policy loan allows policyholders to borrow money from their insurer, using the policy’s accumulated cash value as collateral. This financial tool is available with specific types of life insurance, providing a flexible way to access funds while the policyholder is still living.

Life Insurance Policies with Cash Value

Only life insurance policies that build a cash value component allow for borrowing. Permanent life insurance policies, such as whole life and universal life, are designed to accumulate cash value over time. Whole life insurance typically offers guaranteed cash value growth at a fixed interest rate, with a consistent premium.

Universal life insurance provides flexibility, allowing adjustments to premium payments and death benefits. Its cash value growth can be influenced by interest rates set by the insurer or linked to market performance. Variable universal life insurance, a subset of universal life, allows policyholders to invest the cash value in various sub-accounts, which introduces greater potential for growth but also higher risk. Term life insurance policies do not build cash value and therefore do not offer the option to borrow money.

Cash Value Accumulation and Loan Eligibility

Cash value grows as a portion of each premium payment is allocated to the cash value account, earning interest on a tax-deferred basis. Early in a policy’s life, more of the premium typically covers administrative costs and the cost of insurance, leading to slower cash value growth.

Significant cash value often takes several years to build, with many policies requiring 3 to 5 years, or even up to 10 years or more, before substantial amounts are available for borrowing. Factors influencing this accumulation speed include the policy type, premium payments, and any policy riders or additional features. Policies with higher initial premiums or specific riders may accelerate cash value growth, allowing earlier access to loans. Insurers generally allow borrowing up to 90% or 95% of the policy’s accumulated cash value.

Understanding Life Insurance Policy Loans

A life insurance policy loan is not a withdrawal of funds directly from the cash value but rather a loan from the insurer that uses the policy’s cash value as collateral. The cash value continues to grow within the policy, even while a loan is outstanding, and may continue to earn interest or dividends. Interest rates on these loans are typically competitive, often ranging from 5% to 8%, and can be fixed or variable.

Repayment of a policy loan is generally flexible, with no strict repayment schedule, though interest accrues on the outstanding balance. If the loan and accrued interest are not repaid, the outstanding amount will reduce the death benefit paid to beneficiaries. Tax implications arise if the policy lapses with an outstanding loan. If the loan amount exceeds the policy’s “basis” (the total premiums paid into the policy), the excess can become taxable income to the policyholder.

Accessing a Life Insurance Policy Loan

Obtaining a life insurance policy loan is often a straightforward process once sufficient cash value has accumulated. There is typically no credit check or extensive approval process, as the policy’s cash value serves as collateral for the loan. Policyholders can initiate a loan request by contacting their insurer or agent.

Requests can be made through various channels, including online portals, phone calls, or by submitting specific forms. Necessary information includes the policy number, the desired loan amount, and the preferred method for fund disbursement. The processing time for receiving funds is generally efficient, often taking a few business days to a week.