Can you borrow from a life insurance policy?

If you have one of the permanent life insurance policy types, you can likely borrow from the policy's cash value. (Depending on how they're written, some term policies may also have this feature.) Your policy's cash value grows over time. Once you've accumulated enough cash value, you can borrow money from the life insurance company by using your policy's cash value as collateral. The amount of cash value you need to accumulate before you can request a loan varies by insurer, so check with yours to see what options are available.

Pros of taking a life insurance loan

You might decide to purchase a life insurance policy with cash value because it opens up your loan options in case you ever need one. The benefits of borrowing against life insurance include:

  • Benefitting from a tax-free loan since life insurance loans are not counted as income*
  • Using your loan to pay for whatever you want
  • Paying back your loan when you want and at the frequency you want
  • Getting lower interest rates compared to other loans in the marketplace
  • Having the freedom to secure a policy loan without a credit check or qualification
  • Avoiding the loan getting factored into your credit score
  • Avoiding penalties for taking out a loan — unlike with 401(k) plans, which commonly charge fees for loans

Cons of taking a life insurance loan

Keep these factors in mind before taking out a life insurance loan:

  • If you haven't completely paid back the loan balance and interest when you pass away, the owed amount will come out of your total death benefit, reducing your beneficiaries' payout
  • If the amount you owe grows to equal or exceed your policy's total cash value, it can result in your policy lapsing and you having to pay taxes on the borrowed funds
  • Any money you borrow from your policy's cash value is no longer protected from creditors
  • A policy takes several years to build cash value, so you won't be able to take a loan against your life insurance right away

How much can I borrow from my life insurance policy?

The limit for borrowing money from life insurance is usually set by the insurer, but it's typically no more than 90% of the policy's cash value. When you take out a policy loan, you're actually receiving the funds from your insurance company, with your cash value used as collateral. That offers a significant benefit since the cash value stays within the policy and continues to grow.

Your policy's cash value can keep growing even if you borrow from it.

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