When Can I Borrow From My Whole Life Insurance?

Whole life insurance is a type of permanent life insurance that provides coverage for the policyholder’s entire life. Unlike term life insurance, it includes a savings component known as cash value. This cash value grows over time on a tax-deferred basis, creating a financial resource that policyholders can access, including through policy loans.

Eligibility and Availability

Borrowing from a whole life insurance policy depends on the accumulation of sufficient cash value. Cash value typically begins to build in the early years, though significant accumulation for substantial loans usually takes several years. The policy must also remain active and in good standing for a loan to be possible.

The amount available for a loan is generally a percentage of the accumulated cash value. Many insurers allow policyholders to borrow up to around 90% of their policy’s cash value, though this percentage can vary by company and policy terms. Any existing policy loans will reduce the amount a policyholder can borrow. Some insurers may also impose minimum loan amounts.

Loan Process and Mechanics

Initiating a loan against a whole life insurance policy typically involves contacting the insurance company. Policyholders can request a loan through an online portal, by phone, or by speaking with their insurance agent. The process is generally straightforward because the policy’s cash value serves as collateral, eliminating the need for credit checks or extensive approval procedures.

When requesting a loan, policyholders usually need to provide their policy number, the desired loan amount, and their preferred disbursement method. Funds can typically be received via direct deposit or a check. Policy loans accrue interest, which can be either a fixed or variable rate, as outlined in the policy contract. If interest payments are not made periodically, they are typically added to the outstanding loan balance, increasing the total amount owed.

Whole life insurance loans offer flexible repayment options. There is generally no fixed repayment schedule, allowing policyholders to make interest-only payments, repay the loan in a lump sum, or even choose not to repay the principal at all. However, while repayment is flexible, any unpaid loan balance and accrued interest will have implications for the policy.

Implications of Borrowing

An outstanding loan balance, including any accrued interest, will directly reduce the death benefit paid to beneficiaries upon the insured’s passing. If the loan is not repaid, the financial protection intended for beneficiaries will be diminished by the amount of the loan and its accumulated interest.

An unpaid loan carries the risk of policy lapse. If the loan balance, along with accrued interest, grows to exceed the policy’s cash value, the policy can lapse. A policy lapse results in the loss of insurance coverage and can trigger potential tax implications, as the outstanding loan amount may be considered taxable income if it exceeds the premiums paid into the policy.

The portion of cash value utilized for a loan typically does not continue to earn dividends or interest for the policyholder. The policyholder’s ability to benefit from the growth of the borrowed cash value is suspended.

Policy loans are generally considered tax-free when taken, as they are viewed as debt rather than income. However, this tax-free status can change if the policy lapses or is surrendered with an outstanding loan. In such cases, the amount by which the loan exceeds the policy’s basis (the total premiums paid, minus any dividends received) can become taxable income. This can lead to an unexpected tax liability for the policyholder.