How to borrow against a life insurance policy
If you have permanent life insurance, you may be able to use your policy's cash value as collateral to take out a loan. You can request a loan from your life insurance company for any reason, and there isn't an approval process. The only requirement is that you have sufficient cash value to borrow against (minimum amounts vary by insurer). However, borrowing against a life insurance policy isn't risk-free; unpaid life insurance loans may reduce your death benefit or cost you your policy.
How much can I borrow from my life insurance policy?
The limit for borrowing money from life insurance is set by the insurer, and it's typically no more than 90% of the policy's cash value. When your policy has enough cash value (minimums vary by insurer), you can use it as collateral to request a loan from your insurance company. Keep in mind that if you have a newer policy it may take several years before it has accrued enough value for you to borrow against.
Life insurance loans are only available on permanent life insurance policies — such as whole life and universal life — that have a cash value component. You likely can't borrow against a term life insurance policy since it probably doesn't have cash value. Learn more about term vs. whole life insurance.
Reasons to borrow from your life insurance policy
- You need extra cash fast: Since life insurance loans don't have any additional requirements, such as a credit check, employment verification, or minimum income requirements, you can easily get money when you need it.
- You don't want to risk other assets: Because your policy's cash value is used to secure the loan, you don't have to put other assets at risk. And your cash value will continue to grow after you borrow money against it.
- You don't want a repayment schedule: You can pay back your loan when you want to rather than being tied to a repayment schedule. But it's important to not let your owed amount exceed your cash value, and you should continue paying your premium on time so you don't have a lapse in life insurance coverage.
- You want to avoid loan restrictions: There are no restrictions on how you can spend the money. You can use it to pay for anything you want.
Do you have to pay back a life insurance loan?
Life insurance loans don't have a strict repayment schedule, but it's in your best interest to pay back a life insurance loan as soon as you can. The longer your loan is left unpaid, the more interest you'll end up owing. And if you don't make regular payments, your policy will be in jeopardy of lapsing, especially if the amount owed exceeds your policy's cash value.
Additionally, if you die with an outstanding life insurance loan on your policy, your insurer will deduct the amount owed from your death benefit, leaving your beneficiaries with less money.
IS BORROWING AGAINST LIFE INSURANCE TAX-FREE?
Life insurance loans are generally tax-free. But if you don't repay the loan or your policy lapses, you may owe taxes on the amount borrowed. Speak with a financial advisor regarding tax implications before borrowing from a life insurance policy.
How high are interest rates on a life insurance loan?
According to MarketWatch, interest rates on a life insurance loan typically range from 5% to 8%, much lower than the average rate for personal loans and credit cards. This is why borrowing against life insurance can be a relatively affordable option for policyholders who need a quick loan.