How to Get a Loan From a Life Insurance Policy

A life insurance policy loan provides a way for policyholders to access funds by leveraging the accumulated cash value within their permanent life insurance policies. This financial tool allows individuals to borrow money directly from their insurance company, using their policy’s cash value as collateral. It presents an alternative to traditional lending options, as it generally does not involve credit checks or extensive application processes typical of bank loans or credit cards. The loan comes from the insurer, and the policy’s cash value continues to grow, serving as security. This provides a flexible way to obtain liquidity without surrendering the policy or impacting its long-term benefits.

Eligibility and Policy Requirements

Only permanent life insurance policies accumulate cash value, making them eligible for loans. These include whole life, universal life, variable universal life, and indexed universal life policies, all of which build cash value over time. Term life insurance policies, conversely, do not generate cash value and therefore do not offer a loan option.

The cash value represents a portion of the premiums paid that grows on a tax-deferred basis, functioning as a savings component within the policy. This accumulated value serves as the collateral for any loan taken against the policy. For a policy to be eligible for a loan, it must be in force and possess sufficient cash value to support the requested loan amount.

Insurers typically allow policyholders to borrow a percentage of their accumulated cash value, often 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, depending on the specific policy terms and the insurer’s rules. It takes several years for a policy to build sufficient cash value for a loan.

Understanding Loan Mechanics and Implications

A life insurance policy loan is a loan against the policy’s cash value, distinct from a withdrawal. The policy remains intact, and the cash value continues to grow, even with an outstanding loan. Interest is charged on the borrowed amount, and rates can be either fixed or variable, typically ranging from 5% to 8%, which is often lower than personal loans or credit cards. This interest accrues on the loan balance, and there is generally no rigid repayment schedule.

Policyholders can repay the loan at their own pace, or choose not to repay it. However, any outstanding loan balance, including accrued interest, will be deducted from the death benefit paid to beneficiaries upon the policyholder’s passing. This reduces the amount beneficiaries receive.

An unpaid loan risks policy lapse. If the outstanding loan balance, with its accumulating interest, grows to exceed the policy’s cash value, the insurance company may terminate the policy. Such a lapse can trigger adverse tax consequences. The loan amount, to the extent it exceeds the premiums paid into the policy, can become taxable income to the policyholder. This “phantom income” can result in an unexpected tax liability, especially if the policy had accumulated substantial gains over many years.

Applying for Your Policy Loan

The process for obtaining a loan against a life insurance policy is straightforward, bypassing extensive underwriting and credit checks. The policyholder initiates the request directly with their insurance provider. This can be done through a phone call, an online portal, or by contacting their insurance agent.

The insurer requires specific information to process the loan, such as the policy number, desired loan amount, and personal identification details. A simple loan request form may need to be completed. Many insurers have streamlined this, allowing requests without extensive paperwork, particularly if using an online platform.

Once the request and any necessary documentation are received, the insurance company processes the loan. Processing time varies but typically ranges from a few business days to a week or two. Funds are disbursed through direct deposit into the policyholder’s bank account or by mailing a check. After disbursement, the policyholder receives confirmation, statements detailing the outstanding balance, and information regarding accrued interest and repayment methods.