How Much Can I Borrow From Life Insurance?

A life insurance policy loan allows policyholders to access funds from their permanent life insurance coverage. Unlike traditional bank loans, funds are borrowed directly from the issuing insurance company. The policy’s accumulated cash value serves as collateral, meaning the loan is secured by the policy’s own value. Policyholders essentially borrow against their own money built up within the contract.

Policies Allowing Borrowing

The ability to borrow from a life insurance policy is directly linked to its cash value. This savings component, built into certain types of policies, accumulates over time as premiums are paid and earnings are credited. This accumulated cash value is the source for policy loans.

Only permanent life insurance policies build cash value, making them the sole types from which a loan can be taken. Examples include Whole life, which offers guaranteed cash value growth, and Universal life, providing flexibility with growth based on market interest rates. Variable universal life policies link cash value growth to investment performance, introducing more risk and potential for higher returns.

Term life insurance policies do not accumulate cash value. They provide coverage for a specific period, like 10, 20, or 30 years, and lack a savings component. Therefore, term policies do not offer the option to borrow funds, as there is no cash value for collateral.

Determining Borrowable Amount

The amount you can borrow from a life insurance policy is tied to its accumulated cash value, not the death benefit. Insurers typically allow borrowing of 75% to 90% of the policy’s cash surrender value.

Cash surrender value is the amount received if you cancel the policy, which is cash value minus surrender charges. Existing loans reduce the amount available for a new loan. Insurer rules, such as administrative fees or minimum cash value requirements, might also reduce the available loan amount.

As cash value grows with consistent premium payments and favorable crediting rates, the amount available for a loan increases. This growth provides a larger pool of funds. These loans do not require a credit check, as the policy’s cash value serves as collateral.

Loan Application Process

Initiating a life insurance policy loan begins by contacting your insurance carrier. Insurers offer multiple ways to request a loan, including customer service calls, online portals, or written requests. Have your policy number available.

When requesting a loan, the insurer requires information like your policy number, the specific loan amount, and identity verification. The company verifies the available loan amount against your policy’s current cash value.

Most insurers require a specific loan request form. These forms can be downloaded, mailed, or completed online. The form asks for the desired loan amount and your preferred fund disbursement method, such as direct deposit or a mailed check. Once completed, it can be submitted online, mailed, or faxed.

After submission, processing time varies by insurer and method, typically taking a few business days to a week. Funds are disbursed via direct deposit or mailed check. Confirming the expected timeframe with your insurer can help manage expectations.

Managing the Loan

Once a life insurance policy loan is taken, interest accrues on the outstanding balance. The interest rate, set by the insurer, can be fixed or variable, often ranging from 5% to 8%. This accrued interest is added to the principal, increasing the total owed.

Life insurance policy loans offer flexible repayment. Policyholders are not required to follow a rigid schedule. You can repay principal and interest, pay only interest to prevent growth, or choose not to repay the loan during your lifetime.

Any outstanding loan balance, including accrued interest, is deducted from the policy’s death benefit when the insured passes away. This reduces the payout to beneficiaries. For example, a $50,000 outstanding loan on a $500,000 death benefit would result in beneficiaries receiving $450,000.

Failing to repay the loan risks policy lapse if the outstanding loan balance plus accrued interest exceeds the policy’s cash value. If this occurs, the policy terminates. If a policy lapses with an outstanding loan, the loan amount up to the gain may be treated as a taxable distribution by the Internal Revenue Service, potentially creating an unexpected tax liability. While a loan is outstanding, the policy’s cash value grows, but the net cash value available is reduced by the loan balance.