Can You Borrow Against a Life Insurance Policy?

In this article...
  • If you need money quickly, you may be able to borrow against a life insurance policy. Explore the advantages and disadvantages of a life insurance policy loan.

If you need money quickly but can’t get a loan through traditional channels, you may be able to borrow against your life insurance policy. When you borrow against a life insurance policy, you can often get money in days, and you won’t need to have good credit or a certain level of income to qualify. However, there are downsides to this type of loan, so it’s important to consider the advantages and disadvantages before filling out the applicable paperwork.

Can You Borrow Against a Life Insurance Policy?

Whether you can borrow against a life insurance policy depends on the type of plan and its contractual terms. Policyholders who have permanent life insurance, including whole life and universal plans, may be able to take out a loan against their policy if the accumulated cash value is high enough, as determined by the individual insurer. Loan options are typically not available to individuals with term life insurance policies because these policies don't have a cash value and they terminate after a designated period of time.

Can a Beneficiary Borrow From a Life Insurance Policy?

A beneficiary typically can’t borrow against a life insurance policy unless they’re also the policyholder. However, if a beneficiary has power of attorney for the policyholder, which lets them make financial decisions on the policyholder’s behalf, they may borrow against the policy or cash it out completely if it’s in the policyholder’s best interests.

How Does a Life Insurance Policy Loan Work?

Permanent life insurance policies typically have a cash value in addition to the death benefit. This cash value gives a permanent policy liquidity, so it may be cashed out or borrowed against if the policyholder needs money.

After a policy’s cash value reaches a certain amount, as determined by your individual insurer, you may apply for a policy loan. The loan origination process is generally straightforward. Borrowers fill out a simple request form from the insurer and must confirm their identity, but they don’t need to provide proof of income, and no credit checks are involved. The insurance company sets the loan terms, limits and interest rate, and the funds are often deposited into the borrower’s account within days.

In certain situations, such as when a policy has recently changed ownership or the loan request exceeds a designated amount, the borrower may be required to provide a notarized confirmation of identity or sign additional documents before the money is released to their account.

Insurance policy loans are designed to be paid back. If the debt isn’t repaid, the death benefit may be substantially reduced, or the policy may lapse altogether.

How Much Can You Borrow Against a Life Insurance Policy?

The maximum amount of a life insurance policy loan depends on your insurer, the plan’s contractual terms and how much the plan is currently worth. You can typically borrow up to a certain percentage of the cash value of your policy, which may be as high as 90%.

What Are the Advantages and Disadvantages of a Life Insurance Policy Loan?

Almost every type of loan has pros and cons, and a life insurance policy loan may not be right for every borrower. Prior to borrowing against your permanent life insurance, it may be helpful to weigh these advantages and disadvantages.

Advantages of a Life Insurance Policy Loan

If you need money quickly and can't qualify for a traditional loan, a life insurance policy loan may be the solution. This type of loan delivers cash in days and has few restrictions. Life insurance policy loans may also have the following advantages:

  • No credit checks. You typically don’t need to qualify for a life insurance policy loan because the cash value of the policy serves as collateral. Plus, because there are no credit checks, applying for a life insurance policy loan won’t impact your credit report.
  • Low interest rates. Although interest rates are set by the individual insurer, they’re generally lower than those of traditional bank loans. Plus, you’ll continue to earn interest on your policy’s cash value while you’re paying off your loan, which can offset any interest you're paying.
  • Flexible payback options. Although it’s financially beneficial to pay off your loan as quickly as possible, it isn’t required. Most life insurance policy loans may be paid off at any time, as long as compounding interest doesn’t raise the amount of the loan to more than the cash value of the policy. Payback options may include paying just the interest or periodic payments toward the principal plus annual interest payments.
  • No taxability. When you take out a life insurance loan, you’re borrowing against money you’ve paid into the policy, so it’s not taxable by the IRS.

Disadvantages of a Life Insurance Policy Loan

Because life insurance policy loans pay out quickly and have few restrictions, they’re a great way to access money if you need to pay for an emergency expense. However, these loans may have the following disadvantages:

  • Reduced death benefits. If you don’t pay back your loan, you risk reducing the death benefit, leaving your beneficiaries with less financial protection if you die. Additionally, if you don’t pay off your loan quickly, interest can add up, cutting into the death benefit.
  • Potential policy lapse. As interest compounds, your outstanding loan balance grows. If your loan balance becomes larger than the cash value on your policy, your insurance may lapse, leaving you without coverage altogether.

How Long Does It Take to Build Cash Value on Life Insurance?

Cash value accrues on a life insurance policy as you pay your premiums. How long it takes to build cash value on a policy generally depends on several factors:

  • The type of plan you have
  • How long you’ve had the plan
  • The amount and frequency of your premium payments
  • How much of your premium is applied to the policy’s cash value, the death benefit and administrative expenses
  • Current interest rates
  • How well associated investment plans perform

Your financial advisor or a plan representative can help you assess the rate of accrual on your individual policy. However, policyholders should typically expect the cash value to accrue for at least 10 years before the policy has enough collateral to borrow against. 

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