How do life insurance loans work?

Life insurance loans are only available on permanent life insurance policies — such as whole and universal life — that have a cash value component. Your policy's cash value grows over time. When there's enough (minimums vary by insurer), you can use it as collateral to request a loan from your insurance company.

Remember, you likely can't borrow against a term life insurance policy since it probably doesn't have cash value. Learn more about term vs. permanent life insurance.

Pros of life insurance loans

If you're in a pinch and you need extra cash to cover expenses, life insurance loans have several advantages, including:

  • No additional requirements: Borrowing money from a life insurance policy doesn't require you to undergo a credit check, employment verification, or meet minimum income requirements. This can make it easier to get money when you need it.
  • No additional collateral: Because your policy's cash value is used to secure the loan, you don't have to put other assets at risk.
  • No 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 your policy doesn't lapse.
  • No restrictions: There are no restrictions on how you can spend the money. You can use it to pay for anything you want.
  • Continued cash value growth: Since your cash value is only used as collateral for your loan, it remains in your policy and continues to grow.

Cons of life insurance loans

While life insurance loans have many benefits, there are also some disadvantages to watch out for:

  • Cash value minimum: Each insurer has different requirements for how much cash value you need before requesting a life insurance loan, and it can take years for your policy's cash value to grow enough that you can borrow against it.
  • Loan limits: 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. If you need more than that amount, you may need to consider other loan types.
  • Reduced death benefit: Suppose you take out a loan against your policy and don't pay it back before you die. Your insurance company will deduct the amount you owe from the death benefit, reducing the payout to your beneficiaries.
  • Policy lapse: While there's no set repayment schedule for a life insurance loan, interest accrues over time as a percentage of the amount you borrow, increasing the amount you need to repay. If you don't make regular payments, your policy will be in jeopardy of lapsing, and if there is a lapse you will not have coverage.
  • Taxes: If you get a loan and don't repay it 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 to get life insurance

You can get a life insurance quote online. You'll be asked questions; then you'll choose your payment amount, term length, and other policy details. You can also call 1-866-749-7436 to speak with a licensed representative who can help you find the right policy for you.