How Soon Can I Borrow From My Life Insurance Policy?

Life insurance policies can offer more than just a death benefit for your beneficiaries; certain types can also serve as a financial resource during your lifetime through policy loans. These loans allow policyholders to access funds by borrowing against the accumulated cash value within their policy. Understanding how these loans function, their availability, and financial implications is important.

Accessing Your Policy’s Cash Value

Only permanent life insurance policies, such as whole life, universal life, variable universal life, and indexed universal life, accumulate cash value, which is the foundation for a policy loan. Term life insurance policies do not build cash value and therefore do not permit loans. The cash value within a permanent policy grows over time as a portion of each premium payment is allocated to this component, earning interest or investment gains on a tax-deferred basis. While cash value may begin to accrue in two to five years, it can take around ten years to become substantial enough for a policy loan. The loan is taken against this accumulated cash value, meaning the cash value itself acts as collateral, and the funds for the loan come from the insurer’s general account. The cash value generally continues to grow within the policy even while a loan is outstanding.

Initiating a Policy Loan

To obtain a policy loan, contact your life insurance company directly. This can be done through their customer service line, online portal, or by mail. The insurer will provide the necessary loan request forms, which are straightforward as there is no credit check or extensive approval process. You will need to provide specific information from your policy, such as your policy number and the desired loan amount. Insurers allow policyholders to borrow up to 90% or 95% of the policy’s accumulated cash value. After submitting the completed loan request form, funds are typically disbursed within a few business days to about a week.

Managing Your Policy Loan

Policy loans accrue interest, which can be at a fixed or variable rate determined by the insurer. This interest is charged on the outstanding loan balance and, if not paid, will be added to the principal, causing the loan balance to grow. Unlike traditional bank loans, life insurance policy loans offer flexibility regarding repayment; there are no mandatory monthly payments or fixed repayment schedules. Policyholders can choose to repay the loan at their convenience, make partial payments, or even opt not to repay it at all.

However, any outstanding loan balance, including accrued interest, will reduce the death benefit paid to beneficiaries upon the policyholder’s death. For example, a $50,000 outstanding loan on a $250,000 death benefit would reduce the payout to $200,000. Furthermore, the portion of the cash value used as collateral for the loan may be subject to “direct recognition,” meaning it might earn interest or dividends at a different, potentially lower, rate than the unencumbered cash value.

Policy lapse is a risk if the outstanding loan balance, combined with accrued interest, exceeds the policy’s cash value. If this occurs, the policy terminates, leading to loss of coverage. In such a scenario, the unpaid loan amount may be treated as a taxable distribution, potentially creating an unexpected tax liability on any policy gains.