How to Get a Loan From Your Life Insurance

Life insurance policies offer more than a death benefit; certain types provide a living benefit through their accumulated cash value. Policyholders can access these funds by taking a loan against their policy, which differs from a direct withdrawal. This option allows individuals to leverage their policy’s value without surrendering coverage. Understanding these loans, from cash value establishment to application and repayment, is important for policyholders.

Understanding Life Insurance Loans

Cash value is a portion of premium payments in certain life insurance policies that accumulates tax-deferred interest. This component can be a source of funds during the policyholder’s lifetime. Permanent life insurance policies, such as whole life, universal life, variable universal life, and indexed universal life, build cash value. Term life insurance policies do not have a cash value component and cannot be used for loans.

A life insurance loan is not a direct withdrawal from the cash value. Instead, the insurer lends the policyholder money, using the policy’s cash value as collateral. The cash value continues to grow within the policy, even while the loan is outstanding. Policy loans often do not require a credit check or strict income qualifications, making them an accessible option for those needing funds quickly.

Accessing Your Policy’s Cash Value

Before applying for a loan, policyholders should determine their policy’s accumulated cash value. This value grows based on premiums paid, policy duration, and death benefit size. It typically takes several years, often five to ten, for a policy to build sufficient cash value for a loan. The amount available for a loan is generally a percentage of the cash value, often up to 90% or 95%.

Policyholders can find their current cash value and maximum loan amount by reviewing annual policy statements, which detail financial performance. Another method is to contact the insurance provider’s customer service department for up-to-date information and specific terms. Many insurers also offer online policy portals to view cash value and explore loan options.

The Loan Application and Funding Process

Once the eligible loan amount is confirmed, the formal application process begins. Steps to obtain the loan application form vary by insurer. Many providers offer forms for download from their online portal or customer service website, or they can be requested via mail or through an agent.

Completing the application requires basic policy information, the desired loan amount, and fund disbursement details. Policyholders typically provide bank account information for direct deposit, though some insurers offer physical checks. Processing time ranges from a few days to several weeks. Upon approval, funds are usually disbursed within a week via the chosen method.

Understanding Loan Terms and Repayment

Life insurance loans carry interest, often lower than personal loans or credit cards, typically ranging from 5% to 8%. Interest accrues on the outstanding balance and may be fixed or variable. While the loan is outstanding, the policy’s cash value may continue to earn interest or dividends, offsetting some loan cost.

Repayment terms are flexible, often without a fixed schedule. Policyholders can repay principal and interest over time, pay only interest annually, or defer repayment indefinitely. If the loan and accrued interest are not repaid, the outstanding balance will be deducted from the death benefit. If the outstanding loan balance exceeds the policy’s cash value, the policy may lapse, terminating coverage. A lapsed policy with an outstanding loan may result in the borrowed amount exceeding premiums paid becoming taxable income. Interest paid on life insurance loans is generally not tax-deductible.