How to borrow money from your 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 wonder, "Can I borrow from my life insurance?" — for example, to help pay for home repairs or other unexpected expenses.
The answer may be yes, if you have a form of permanent life insurance that builds cash value.1 Term life insurance cannot be borrowed against, while permanent life insurance often can be.
Life insurance loans can be a flexible alternative to credit cards and bank loans and can often have competitive interest rates.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 much you may be able to borrow
How soon you can borrow after purchasing a policy
Pros and cons to keep in mind
What are life insurance loans?
A life insurance loan is a financial loan taken out against the cash value of a permanent life insurance policy. It allows the policyholder to receive a loan without a lengthy credit application process — and it keeps the life insurance policy active, so long as premium payments are made on time.
These loans are only possible if you have a permanent life insurance policy that builds cash value. It generally takes a few years for adequate cash value to build up in your policy before it makes sense to take out a loan.
Life insurance loans can be paid back over time, with interest. However, unlike most other forms of borrowing, repayment isn’t typically required on a specific schedule. This offers the policyholder some flexibility in how and when the loan is repaid. As long as monthly premiums for the original policy are made, and sufficient cash value remains to cover the loan interest, the policy will stay in place regardless of principal repayments towards the loan. However, remember that if the policyholder passes away before the loan is repaid, the death benefit amount will be reduced by the outstanding loan amount.
Does your type of life insurance allow policy loans?
Only certain kinds of life insurance policies can be borrowed against. Generally speaking, there are two broad categories of life insurance:
Permanent life insurance — whole and universal life — generally allows policy loans. These types of policies have a cash value component which builds over time, and are designed to provide coverage for the life of the policyholder.3
Term life insurance doesn't allow for policy loans. This type of policy provides coverage for a set period of time (for example, 10 years) and doesn't have a cash value component. That’s why this type of coverage is sometimes called "pure life insurance."
Cash value is the 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 typically starts at $0. With each subsequent premium payment, a portion of your premium can grow tax-deferred over time.4 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 may be tied to market investments, 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.
How to borrow from a life insurance policy
Make sure you have the right type of policy: Generally, only permanent life insurance policies, like whole or universal life, qualify for loans. Term life insurance does not allow policy loans.
Build up sufficient cash value: It typically takes several years to build up enough cash value in a life insurance policy in order to take out a loan.
Determine how much you can borrow: You can generally borrow up to 90% of the cash value of your policy.
Request a loan from your life insurance company: The policy provides complete collateral for your loan, so there's no need for credit approval, and you can request a loan for any reason.
Understand the terms of the loan: Each life insurance company will have its own terms and conditions. Take a close look at the interest rate, repayment schedule, and learn what happens if you fail to repay your loan (this can potentially result in lapsed coverage).
Consider the tax implications: Life insurance loans are generally income tax-free. With that said, if you fail to repay a loan and your coverage lapses, you could owe income tax on all or a portion of the amount borrowed.
Again, each policy and provider has somewhat different terms and conditions for life insurance loans, so it's best to contact your insurance company or agent directly for specific questions about how to borrow from your life insurance policy.
General rules for life insurance loans
While terms vary from one policy to the next, here are some general rules that apply to most policy loans:
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 out a large loan, you may have to wait until the cash value balance reaches 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 important to remember that the policy is designed to be a long-term asset that lasts your entire life. And the policy's most important financial benefit is in effect from day one: it will provide the full death benefit payout if needed, even if you can't yet take out a policy loan.
How much can you borrow?
Rules vary, but life insurance companies typically allow you to borrow up to around 90% of the current cash value of your policy. 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.
Do you have to pay back loans on life insurance?
You actually don’t need to repay a life insurance policy loan — but it is typically in your interest to do so. If you do not repay a loan, the value of the policy's death benefit will decrease, meaning your beneficiaries will be left with less should you pass away. Additionally, there can be tax implications if you fail to repay a life insurance loan or if failure to pay causes a policy lapse.
The application 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 again, check with your insurance company or agent for specifics.
After you submit your application, you’ll have to wait for processing. This may take two weeks to a month.
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 when applying for 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. | 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. |
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. | Can be slow to fund: In some cases, receiving funds from life insurance loans can take a month or more. Alternatives like credit cards and some personal loans can be faster. |
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). | 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. |
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. | 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. |
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 | 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. |
Flexible repayment: Life insurance loans can be paid back over time in a flexible manner, unlike the fixed repayment schedules of traditional loans. And again, most life insurance loans don't actually have to be paid back — although outstanding loan values are deducted from the death benefit, and can have tax implications. |
When it makes sense to borrow from life insurance
There are several scenarios in which borrowing from life insurance policies can make good financial sense. Here are a few examples, but you may also wish to speak with a financial professional for personalized guidance.
You can’t qualify for traditional loans
Life insurance loans are unique in that the policy value provides collateral for the loan itself, so there is generally no credit check or lengthy application process. If you have limited credit history or a low FICO score, borrowing from life insurance may be an effective way to tap into cash for an unexpected expense.
You want to avoid high-interest debt like credit cards
The interest rates on life insurance loans can be competitive, especially in comparison to credit cards. This can help you save money on interest.
You’ve built up sufficient cash value
Insurance providers may allow you to borrow up to 90% of your policy's cash value. It only makes sense to take out a life insurance loan if there is enough cash value built up to borrow the amount you need. Remember, you can't borrow against the death benefit face value — only the cash value component.
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, speak to your insurance agent or company representative to ensure 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 insurance 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.