How to Get a Loan From Your Life Insurance Policy

A life insurance loan allows policyholders to access funds from their policy’s accumulated cash value while keeping coverage active. The policy’s cash value serves as collateral. Unlike traditional loans, which often require a stringent application and credit history review, life insurance loans typically offer a more streamlined process. They provide liquidity without fully surrendering the policy or immediately impacting its long-term benefits.

Policy Eligibility and Loan Mechanics

Life insurance policies that accumulate cash value are eligible for policy loans. These include permanent life insurance types such as whole life, universal life, variable universal life, and indexed universal life policies. These policies build tax-deferred cash value from a portion of premiums paid. Term life insurance policies do not accumulate cash value and cannot be used for a loan.

A life insurance loan differs from a withdrawal as it is a loan from the insurer, with the policy’s cash value serving as collateral. The borrowed funds do not directly reduce the policy’s cash value, which continues to grow, potentially earning interest or dividends, even with an outstanding loan. Insurers typically allow borrowing up to 90% of the accumulated cash value. Minimum amounts vary by insurer, and newer policies may need several years to build sufficient value. The interest rate, set by the insurer, can be fixed or variable and accrues on the outstanding balance.

Repayment of a life insurance loan is generally not mandatory, offering policyholders flexibility. However, interest continues to accrue on the unpaid balance, increasing the total amount owed. While there isn’t a strict repayment schedule, managing the loan is important to avoid negative impacts on the policy. The loan represents an advance against the policy’s death benefit.

Preparing for a Loan Application

Before initiating a life insurance loan application, confirm your policy’s current cash value and the maximum available loan amount. This information is typically accessible through the insurer’s online policyholder portal, a customer service representative, or your most recent policy statement. Understanding the exact cash value is crucial as it determines your borrowing capacity.

Consult your specific policy contract for detailed loan terms. This includes the applicable interest rate (fixed or variable), repayment options, and any administrative fees. Policy contracts outline rules governing loans, such as minimum loan amounts or waiting periods. Identify the correct contact method or department within the insurance company, whether it’s a dedicated loan department or general customer service, to streamline the inquiry process.

Have essential information readily available before contacting the insurer or starting an online application. This includes your policy number, personal identification details, and potentially your Social Security number. Some insurers may require specific forms, typically available for download from their website or by direct request. Preparing this information beforehand helps ensure a smooth transition to the application phase.

The Loan Application and Disbursement Process

Once preparatory steps are complete, policyholders can submit their loan request through various methods provided by the insurer. Many companies offer an online policyholder portal, where users can navigate to a dedicated section for loan requests. This digital method involves filling out an electronic form with policy and personal details, then submitting it directly through the portal.

Alternatively, policyholders may submit a completed loan request form by mail. This involves printing, accurately filling out, and mailing the form to the designated address. Submitting a request via phone to the customer service department is also an option; a representative will guide the policyholder through the necessary information and confirm details.

The processing timeline for a life insurance loan request generally ranges from a few business days to one to two weeks, depending on the insurer and submission method. Once approved, funds are typically disbursed via direct deposit into the policyholder’s bank account, which is often the fastest method. Some insurers may also offer disbursement via a physical check mailed to the policyholder’s address. Following submission, policyholders should anticipate confirmation or follow-up communications regarding the status of their loan and its disbursement.

Managing Your Life Insurance Loan

Repaying a life insurance loan is generally optional, providing policyholders flexibility. Interest continues to accrue on the outstanding balance, and payments reduce the loan principal, restoring the policy’s full cash value over time. While there is no strict repayment schedule, proactively managing the loan helps maintain the policy’s health.

An outstanding loan balance, including accrued interest, directly reduces the death benefit paid to beneficiaries. If a policyholder dies with an unpaid loan, beneficiaries receive a reduced payout. If the loan balance and accrued interest exceed the policy’s cash value, the policy can lapse. A policy lapse due to an outstanding loan can have severe consequences, including loss of coverage and potential tax implications.

Life insurance loans are generally tax-free, provided the policy remains in force. However, a loan can become taxable if the policy lapses or is surrendered with an outstanding loan balance that exceeds the premiums paid. This is because the outstanding loan amount, if not repaid, may be treated as a distribution of policy earnings. Careful monitoring of the loan balance relative to the policy’s cash value and premium payments is important to avoid unintended tax liabilities.