How to Borrow Against Life Insurance?

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Updated: 28 February 2024
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Insuranceopedia Staff
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Many individuals inquire about borrowing against life insurance, and it’s a pertinent question as your policy can serve as a convenient source of additional funds. The process is typically swift, with no restrictions on fund usage and no fixed repayment schedule. Moreover, insurance loan costs are often minimal and offer greater flexibility compared to unsecured personal loans from banks.

However, it’s essential to be aware of potential downsides. For instance, failure to repay the loan or accrued interest could diminish the death benefit and potentially jeopardize the entire policy if it breaches its terms. Read on to discover more about borrowing against life insurance and address critical questions related to this financing option.

How Do Life Insurance Loans Work?

A life insurance loan can be a valuable means of borrowing money, essentially allowing you to borrow against your own policy. The key requirement for this financing option is to have sufficient cash value in your policy to serve as collateral.

These loans typically require no credit check and have no impact on your credit score, streamlining the approval process. They can be utilized for various purposes, ranging from covering bills and vacation expenses to addressing financial emergencies.

If borrowing against your life insurance policy doesn’t align with your preferences, explore alternative financing options on platforms like BadCredify. This platform provides valuable resources for researching reputable lenders to avoid scams and excessive interest rates, as well as information on different loan types and their respective advantages and disadvantages.

Can You Borrow Against Life Insurance?

Yes, you can access funds from permanent life insurance policies, not term policies. Permanent policies, such as whole life and universal life, accumulate cash value over time. However, it may take several years for this cash value to reach a significant enough level to borrow from the insurance company.

In contrast, term insurance has a fixed duration and typically costs less because it lacks cash value. Consequently, there’s no collateral for the insurance company to secure the loan, rendering borrowing impossible.

You can only convert excess funds from term life insurance to a permanent policy to access additional funds. Therefore, consult your insurance agent to discuss the specifics and implications of this process, as rules and eligibility criteria for life insurance loans vary based on the policy and the insurer.

How to Borrow Money from Your Permanent Life Insurance Policies?

To borrow cash against permanent policies, follow these six steps:

  1. Contact your insurer: Ensure that your life insurance policy is eligible for policy loans.
  2. Determine borrowing limits: Most U.S. insurers offer loans of up to 90% of a policy’s cash value. Explore your financing options accordingly.
  3. Review interest rates and loan terms: Carefully evaluate the interest rates and terms of your potential loan to ensure affordability.
  4. Complete a policy loan application: Once you’ve decided to borrow against your insurance, fill out the loan application and submit it.
  5. Await approval and fund disbursement: After submitting your loan application, await the approval decision.
  6. Plan for repayment: Upon receiving the funds, devise a repayment plan. Timely payments can help avoid high interest charges and allocate funds for more pressing needs.

How Much Can I Borrow from My Life Insurance Policy?

Insurers typically allow borrowing up to 90% of the policy’s stated sum. However, several factors can influence this amount:

  1. Cash value accumulation: Life insurance policies take time to build cash value, primarily through paid monthly premiums. New policies may require considerable time to accumulate sufficient cash value for borrowing.
  2. Policy terms and limits: Each insurance company establishes specific terms and limits regarding the percentage of available loan amounts.

Paying Off a Life Insurance Loan

Policy loan balances are expected to be repaid with interest rates considerably lower than those of bank loans or credit cards, with no mandatory monthly payments.

Failure to repay the loan can diminish the policy’s value and death benefits or potentially result in adverse tax implications.

Reasons to Borrow from a Life Insurance Policy

Borrowing from a life insurance policy can offer several advantages:

  1. Easy access to cash: Policy loans provide cash quickly, often within days, without the need for a credit check or employment verification.
  2. Asset protection: The cash value of your policy serves as collateral, eliminating the need to risk other assets.
  3. Flexible repayment: Repayment terms for policy loans are typically more flexible than those of traditional loans.
  4. No spending restrictions: Borrowed funds can be used for any purpose, providing versatility in addressing financial needs.

Drawbacks of Policy Loans

While policy loans offer benefits, they also entail potential risks:

  1. Tax consequences for non-repayment: Failure to repay loans can result in tax implications, particularly if the outstanding amount exceeds the policy’s cash value.
  2. Reduced death benefit: Skipping payments or accruing interest could decrease the policy’s death benefit, impacting the coverage provided.


Which Types of Life Insurance Policies Can You Borrow Against?

You can borrow against permanent life insurance policies, such as whole life and universal life, which accumulate cash value. Term life insurance policies lack cash value and therefore cannot be borrowed against.

Is It Possible to Borrow From a Term Life Policy?

No, term life insurance policies do not accrue cash value and thus cannot be borrowed against.

When Can I Borrow a Loan Against a Life Insurance Policy?

You can only borrow against your insurance policy once it has accumulated sufficient cash value to cover the desired loan amount. The timeline for this process varies and may take several years, depending on the policy’s design.

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