Can You Borrow Against Term Life Insurance?

Buying a term life insurance policy lets you provide money for your loved ones after you die. When unexpected expenses like medical bills arise or you need to supplement your income due to a job loss or retirement, you may wonder if you can borrow against term life insurance or access the death benefit early. Understanding policy loans and life insurance surrender can help you weigh your options during times of financial hardship or help you choose the right type of life insurance when shopping for a new policy.

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Can You Borrow Against Term Life Insurance?

With a term life insurance policy, you pay a monthly premium for a set time period known as the term. If you die before the policy expires, your named beneficiary receives a lump sum payout.

Term life insurance policies are popular because they usually have smaller premiums and let you get a bigger death benefit at a lower price. Unlike the costlier alternative of whole life insurance, term life doesn't build up a cash value. As a result, you can't borrow against a term life insurance policy.

What Is a Policy Loan?

A policy loan makes it possible to borrow against the accumulated cash value in a whole life insurance policy. Lenders allow you to borrow up to a certain percentage of the value. Normally, lenders won't give you more than 90% of the cash value. Some benefits of policy loans include:

• Maintaining the cash value of your policy. With a policy loan, you simply pledge your policy as collateral. You don't have to withdraw money from the cash account, and you won't lose your death benefit.
  
  
• No repayment period. You normally don't have to repay a policy loan within a set time frame. Instead, you make payments when you can. Interest does accrue each month, so it's best to pay off loans as quickly as possible.
  
  
• Simple underwriting. Because you pledge your life insurance policy as collateral, the lender is unlikely to check your credit or ask for proof of income.
  
  
• No impact to your credit. Most lenders don't report policy loans to the credit bureaus.
  
  
• Low cost. Interest rates for policy loans are generally lower than those associated with unsecured personal loans and credit cards.

Does Term Life Offer a Policy Loan Option?

Term life insurance doesn't offer a policy loan option because it doesn't have any cash value. If you're shopping for life insurance and want the ability to take out a policy loan if needed, whole life insurance may be the better option for your needs.

Can You Cash in a Term Life Insurance Policy Early?

If you no longer need insurance or can't afford your premiums, you can surrender a term life policy early. The insurer will simply cancel the policy. Because the policy has no cash value, you won't receive a payment if you surrender your term life insurance.

Some term life insurance policies have accelerated death benefit (ADB) riders that make it possible to access some of the death benefit before you die. The money is paid out in a lump sum and only available if you meet certain criteria. Most insurers only allow you to take advantage of the ADB if you're diagnosed with a terminal illness and are expected to only live for a short period of time. If you qualify to receive the ADB, the amount that you receive is deducted from your death benefit, leaving your beneficiaries with a smaller payment when you die.