How to Borrow Against Life Insurance

Borrowing against life insurance involves accessing funds from a specific component of a life insurance policy. Policyholders obtain a loan using the accumulated cash value within their policy as collateral, distinct from conventional personal loans or bank credit lines.

Policy Eligibility for Loans

Only permanent life insurance policies, such as whole life, universal life, variable universal life, and indexed universal life, feature a cash value component that can be borrowed against. Term life insurance does not build cash value and therefore does not offer loan capabilities.

Cash value typically grows over time as a portion of each premium payment is allocated to this savings component. For example, in whole life policies, cash value grows at a guaranteed rate, while in universal life policies, it grows based on interest rates set by the insurer or linked to market performance.

It usually takes several years for a policy to build enough cash value for a loan. While some policies might begin accruing cash value in two to five years, it could take approximately 10 years or more before the cash value is substantial enough for a meaningful loan. The specific amount available for borrowing is typically up to 90% of the policy’s current cash value.

Understanding Life Insurance Loans

A life insurance loan is fundamentally different from a withdrawal; it is a loan from the insurance company, secured by the policy’s cash value, which continues to grow.

Loan proceeds are generally not considered taxable income, provided the policy remains in force and the loan amount does not exceed the total premiums paid. However, if the policy lapses or is surrendered with an outstanding loan, any gain (cash value exceeding premiums paid) may become taxable.

Interest accrues on the outstanding loan balance, and this interest is often added to the loan principal if not paid periodically. An outstanding loan balance, including accrued interest, will directly reduce the death benefit paid to beneficiaries upon the policyholder’s passing. Because the loan is secured by the policyholder’s own accumulated cash value, a credit check is typically not required.

Applying for a Life Insurance Loan

Initiating a life insurance loan typically begins with contacting the life insurance company directly. Policyholders can reach out through various channels, including customer service phone lines, online portals, or by mail.

The insurer will usually require specific information to process the loan request, such as the policy number and the desired loan amount. In some cases, a specific loan application form may need to be completed and signed by the policyholder.

Once the necessary information and any required forms are submitted, the processing time for the loan is generally quick. Funds are typically disbursed within a few business days to a week, often via direct deposit to a bank account or by check.

Managing and Repaying the Loan

After a life insurance loan is disbursed, policyholders have considerable flexibility regarding repayment, allowing individuals to make regular payments, sporadic payments, or even no payments at all.

Interest continues to accrue on the outstanding loan balance. If interest payments are not made, the accrued interest is typically added to the principal, increasing the total amount owed. Policyholders can monitor their loan balance and accrued interest through annual policy statements or online portals provided by the insurer.

The primary consequence of not repaying the loan is a reduction in the death benefit paid to beneficiaries. If the outstanding loan balance, including accrued interest, grows to exceed the policy’s cash value, the policy may lapse. A policy lapse with an outstanding loan can lead to unexpected tax liabilities, as the untaxed gain in the policy may become taxable income.