How to Borrow Money From Your Life Insurance

A life insurance loan provides a way to access funds from the accumulated value within certain permanent life insurance policies. This method allows policyholders to use their policy’s value without surrendering the coverage or affecting its in-force status. It functions as an advance from the insurance company, secured by the policy’s own cash value.

Policy Eligibility and Loan Amount Determination

The ability to borrow from a life insurance policy hinges on the presence of “cash value,” a savings component that accumulates within certain policies. This cash value grows from a portion of the premiums paid into the policy, separate from the death benefit. A part of premiums is allocated to cover the cost of insurance and administrative fees, while the remainder contributes to this cash value. This accumulation occurs on a tax-deferred basis, meaning growth is not taxed as long as the funds remain within the policy.

Only permanent life insurance policies, such as Whole Life, Universal Life, Indexed Universal Life, and Variable Universal Life, develop this cash value component. These policies provide coverage for the policyholder’s entire life, distinguishing them from term life insurance. Term life policies do not build cash value and are not eligible for policy loans. It typically takes several years for sufficient cash value to accrue for meaningful borrowing.

The amount available for a loan is directly tied to the accumulated cash value within the policy. Most insurance companies allow policyholders to borrow a significant percentage of this value, commonly ranging from 90% to 95%. For instance, a policy with $50,000 in cash value might permit a loan of up to $45,000 or more. This loan is not a traditional bank loan requiring external collateral; the policy’s own cash value serves as security for the advance.

The funds borrowed are not directly withdrawn from the cash value itself; the insurance company lends money using the cash value as collateral. This arrangement allows the cash value to potentially continue growing, depending on the policy terms, even while a loan is outstanding. The specific terms and conditions, including the maximum loan percentage, are outlined in the individual policy contract.

The Loan Application Process

Initiating a life insurance policy loan is generally a streamlined process, often simpler than securing traditional bank loans. Policyholders typically contact their insurance provider directly, through a customer service line, an online portal, or by reaching out to their insurance agent. Many insurers have dedicated departments or online systems to facilitate these requests.

The information required for a loan application is usually minimal. Policyholders typically need to provide their policy number, the desired loan amount, and confirm beneficiary details. Since the loan is secured by the policy’s cash value, a credit check or extensive financial underwriting is not required. This simplifies the application, as the insurer is lending against an asset already held within its system.

Some insurers may still require specific forms, which can often be downloaded from their website or provided by an agent. Filling out these forms accurately, including personal details and bank account information for direct deposit, helps prevent delays. Submission of these forms, along with any requested identification, finalizes the application.

Upon approval, funds typically disburse within a relatively short timeframe. Depending on the insurer and the chosen method of transfer, funds can be deposited directly into a bank account or sent via check. Processing time can vary, often ranging from a few business days to a couple of weeks.

Managing Your Loan and Policy Implications

A life insurance policy loan, while flexible, accrues interest. This interest is typically calculated on a simple interest basis and is added to the outstanding loan balance if not paid. Interest rates can vary, often ranging between 5% and 8%, depending on the policy and the insurer’s terms. Interest paid on a personal life insurance policy loan is generally not tax-deductible for the policyholder.

One distinguishing feature of these loans is their flexible repayment structure; there is typically no mandatory monthly payment schedule. Policyholders can choose to repay the loan at their discretion, whether through a lump sum, periodic payments, or by allowing the interest to be added to the principal. While repayment is not required, consistently paying at least the accrued interest can help prevent the loan balance from growing and potentially impacting the policy.

An outstanding loan balance, including any accrued and unpaid interest, directly reduces the death benefit paid to beneficiaries upon the insured’s passing. For example, if a policy has a $250,000 death benefit and an outstanding loan of $50,000, beneficiaries would receive $200,000. This reduction occurs because the loan is an advance against the policy’s value, which is recouped by the insurer from the death benefit.

A significant implication arises if the policy lapses or is surrendered with an outstanding loan. While policy loans are generally not considered taxable income as long as the policy remains in force, this tax-free status changes under certain conditions. If the loan balance, plus any accrued interest, exceeds the policy’s cash value, the policy can lapse. In such a scenario, the loan amount, to the extent it represents gain within the policy (cash value exceeding premiums paid), can become taxable income to the policyholder.