How soon can you borrow against a life insurance policy?
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The primary reason to have life insurance is because it can provide a death benefit: A cash sum paid to your beneficiaries in the event of your untimely death. But if you’re currently covered, you may wondering, “Can I borrow from my life insurance?” — for example, to help pay for home repairs or other unexpected expenses. The answer may be yes — though it depends on whether your policy builds cash value.1 Life insurance loans can be a less costly alternative to credit cards and bank loans.2 But how soon can you borrow against a life insurance policy? And is it always a good idea? This guide will help you understand:
How life insurance loans work
How soon you can borrow after purchasing a policy
Pros and cons to keep in mind
First things first: Does your type of life insurance allow policy loans?
Certain life insurance policies can be borrowed against, and others cannot. Generally speaking, there are two broad categories of life insurance:
Permanent life insurance — whole and universal life — is designed to provide coverage for the life of the policyholder.3 These types of policies have a cash value component which builds over time, allowing for policy loans.
Term life insurance provides limited coverage for a set period of time (for example, 10 years). These are sometimes called "pure life insurance" policies because they don't have a cash value component and don't allow for policy loans.
Cash value is the key asset-building component of a life insurance policy, and it can grow to allow for policy loans – you can’t borrow from the death benefit. When you first purchase a life insurance policy, the cash value will typically start at $0. With each subsequent premium payment, a portion of your premium can grow tax deferred over time as part of the cash value component4 Policies typically don’t accrue a meaningful amount of cash value – in other words, enough to borrow against — for the first two to five years of the policy.
Each whole life and universal life policy also calculates cash value growth differently – in some cases, it's tied to a guaranteed interest rate, and in others, cash value growth is tied to variable market performance, such as a stock index. Depending on how well cash value grows in your specific policy, it can take more or less time to generate enough value to borrow against.
General rules for life insurance loans
Each policy and life insurance company will have different rules for life insurance loans, so make sure to contact your life insurance agent or company for the specifics. With that said, there are some general rules that most policies will follow:
You can typically only borrow from permanent life insurance policies, including whole life, standard universal life, variable universal life, and indexed universal life
You typically can’t borrow from term life insurance policies
You typically can’t borrow more than 90% of your policy’s current cash value
You typically must pay interest when paying back the loan
Repayment isn’t required, but outstanding loan balances are subtracted from the death benefit payout, and may cause the policy to lapse with certain types of policies
How long until you can take a loan against a life insurance policy?
You can generally borrow money from your life insurance policy once the cash value component has met a certain minimum threshold. However, to take the loan you want, the cash value balance must also reach an adequate level to provide collateral for the loan size you want. Depending on your policy's rules, cash value growth, and the size of your policy and requested loan, this could take as little as two to ten or more years from the date you purchase your policy. If that sounds like a long time, it's also important to remember that the policy is designed to last a lifetime – and will provide the full death benefit payout from the first day the policy is in effect, even if you can't take out a policy loan.
How much can you take?
Rules vary, but life insurance companies typically allow you to borrow up to around 90% of the current cash value of your plan. This means that if you've accumulated $5,000 in life insurance cash value, you may be able to take a loan for up to $4,500. But remember, your policy is collateral for the loan, and if you pass away after borrowing against your policy, any outstanding loan balance will typically be subtracted from the death benefit payout to your beneficiaries.
The process can take as little as 2-3 weeks. Here’s how it works:
Assuming your policy meets the loan criteria outlined above, you can submit a policy loan application with your insurance provider. The application process tends to be much simpler than a typical bank loan, and many providers allow you to apply online – but check with your insurance company or agent for specifics.
After you submit your application, you’ll have to wait for processing. This can take two weeks to a month — but it varies by provider.
Once your application is approved, funds will typically be sent to your bank account within one week.
From there, you can spend the money as needed.
The pros and cons of borrowing against life insurance
It’s always important to weigh all your different options when it comes to taking a loan. Here’s what to consider with loans from a life insurance policy.
Advantages | Disadvantages |
Easy loan qualification: Unlike traditional loans, you won’t need to meet specific income or credit score requirements in order to qualify for life insurance loans. Competitive interest rates: Though they vary, the interest rates on life insurance loans are typically lower than for a personal loan and significantly lower than credit card rates. Loans for any purpose: You can use life insurance loans for anything, unlike many loans that are tied to a specific purpose (such as the purchase of a vehicle or property). No other collateral requirements: Your policy's cash value is collateral for your loan, so you won't have to put up any other assets — like your home or your vehicle — to secure the loan. Policies can still earn interest and dividends: Even if you take a loan against your policy, the cash value may continue to earn dividends or interest.5 Flexible repayment: Life insurance loans can be paid back over time in a flexible manner, unlike the fixed repayment schedules of traditional loans. In fact, most life insurance loans don't actually have to be paid back — instead, the outstanding value of the loan and interest are deducted from the death benefit (although this can have tax implications). | Not all policies will qualify: Term life and other policies that don't build cash value can't be used for loans. There needs to be enough cash value to secure the loan. Can be slow to fund: In some cases, it can take a month or more to receive funds from life insurance loans. Alternatives like credit cards and some personal loans can be faster. Reduction of death benefit: If you don't repay the loan, the value of your death benefit will be reduced dollar-for-dollar by the loan amount and any accrued interest. For example, if you have a $250,000 death benefit but owe $50,000 on a life insurance loan, the policy's death benefit will be reduced to $200,000. Potential for policy lapses and cancellation: If the loan amount plus interest accrued grows to be more than the policy’s current cash value, your coverage could lapse or even be canceled. Make sure you understand the terms of your policy before taking a loan. Potential tax implications: If your coverage does lapse, you may end up owing taxes on the interest or investment gains of your policy’s cash value. |
Next steps
Permanent life insurance policy loans can be a convenient and flexible way to access extra cash if the need arises. And, if repaid in full and in a timely manner, there may be few, if any, financial drawbacks. However, before taking a loan against your life insurance policy, be sure to speak to your insurance agent or an insurance company representative to make sure you understand the process, terms, pros, and cons of borrowing against your policy. If you do take out a policy loan, remember to keep a close eye on your outstanding loan balance: If it's too close to 100% of cash value, that could cause the policy to lapse.
On the other hand, if you don’t currently have a permanent, cash value life insurance policy and are interested in learning more about the wealth-building advantages it can provide, consider talking with a professional about your options. Look for someone who will take the time to listen to your needs, explain how different whole life and universal life insurance options could be a good fit, and provide life insurance quotes. If you don't have someone to discuss insurance with, Guardian can help you find a nearby financial professional who will listen to your needs and help guide you to the right solution for you.