Most people buy life insurance because it can help provide a financial cushion for the people you love when you pass away. Every life insurance policy has a death benefit — the payout your beneficiaries would receive if you were to die with your policy in force.
But some permanent life insurance policies offer more than a death benefit — they also feature a cash value component. With these types of policies, your life insurance policy can grow cash value over time.
Can you borrow against life insurance policies with cash value? Yes, you can take out a life insurance loan. But it is a decision you should probably consider carefully. Borrowing against life insurance is complex and can lead to complications like unfunded policies or unexpected tax bills.
What is a Life Insurance Loan?
Life insurance loans differ from traditional loans because you are borrowing from your own money, not a lender. Instead, a life insurance loan acts like a cash advance of your policy’s death benefit or surrender value, and the cash value on your life insurance policy serves as collateral.
How Much Can You Borrow Against Life Insurance?
Policy loan requirements vary between insurance companies, but most insurers will loan out a percentage of the cash value of your life insurance policy. And even though you are borrowing against your own money, the insurance company will typically charge interest on a life insurance policy loan.
If you end up borrowing against life insurance but don’t get around to paying back the personal loan before you die, the amount you owe is subtracted from your policy’s death benefit.
Pros and Cons of Life Insurance Loans
Now that we have answered the question of the hour, let’s delve into the possible benefits and concerns of life insurance loans.
Pros of Life Insurance Policy Loans
A life insurance loan might be helpful if you have a permanent life insurance policy with cash value and are looking for some extra funds. Here are some upsides of borrowing against life insurance:
- It’s easy: Unlike a traditional loan, there is no nerve-racking approval process.
- You don’t have to put your assets at risk: The cash value of your life insurance policy is the collateral, so there is no need to put up your house, boat, or houseboat.
- There are no outside requirements: Aside from the minimum cash value requirement, you don’t have anything to prove when you borrow against life insurance. You don’t have to undergo a credit check. There is no deep dive into your earnings. The insurance company doesn’t even do an employment verification.
- You can use it for whatever you want: Some loans come with strings attached, and you may be required to spend the money a certain way. And in many cases, you’ll need to be approved for the life insurance policy loan, which means a lender needs to feel the loan is safe, smart, and justified. But if you are borrowing against life insurance, there are no spending restrictions because it’s technically your money already (provided you have enough cash value built up).
- There is no loan payment due date: When you borrow against a life insurance policy, you can pay the loan back on your own time. Therefore, there are no payment schedules, but (you knew there was a but coming) you will want to keep a close eye on the loan amount to make sure it doesn’t exceed the amount of cash value of your policy, and you should also make sure your premium is paid on time (neglecting to do either of the could result in a policy lapse).
- Your cash value keeps doing its thing: When borrowing against life insurance, your policy’s cash value only serves as collateral, which means it can continue to grow in value even if you take out a policy loan.
Cons of Life Insurance Policy Loans
Borrowing against life insurance can come in handy if you need extra cash, but doing so requires careful attention — an unnoticed detail could cost you in the long run.
- Insurers have loan limits: Every life insurance company has policy loan regulations. Most insurers limit policyholders to borrowing no more than 90% of their policy’s cash value. That amount may not be enough for some to make a high-dollar purchase.
- Cash value takes time to accrue: Insurance companies not only have loan limits, but they also require cash value minimums to take out a loan. So if your policy doesn’t have enough cash value, your insurer won’t grant you a loan. For most, building up enough cash value to qualify for a life insurance loan takes years.
- You could owe taxes: It’s a good idea to tag in a trusted accountant here. If you take out a life insurance loan and your policy lapses, you might end up owing the IRS.
- Your beneficiaries may not get what you were expecting: You likely bought life insurance to help give someone in your life a bit of financial protection in the case of your death. However, if you die before you pay back your life insurance loan, the money owed comes from your death benefit. In some cases, this might result in your beneficiary receiving less money than you had planned.
- You could lose your coverage: Not having a repayment schedule might seem like a great benefit, but it’s good to note that the amount you owe on a life insurance loan accrues interest. So if you don’t make substantial payments and the amount owed grows larger than your cash value, your policy could lapse.
Borrowing Against Different Types of Life Insurance
There are several types of life insurance products on the market, and not all have cash value attached. If you have a life insurance policy with cash value, you may be able to take out a life insurance loan. On the other hand, if your life insurance policy doesn’t have cash value, there is nothing to borrow against it.
Can You Borrow Against Whole Life Insurance?
Borrowing against whole life insurance is a relatively simple process, so long as your whole life policy has enough cash value to meet your life insurance company’s minimum requirements. If you take out a life insurance loan, it’s a good idea to ask your insurer for an in-force policy illustration, a document that uses your policy’s current values to help project what its future values might be.
Can You Borrow Against Term Life Insurance?
You cannot borrow against term life insurance policies because they do not have cash value to be used as collateral. At first blush, this might seem disappointing, but the absence of cash value is one of the reasons term life insurance is the least expensive type of insurance (and the one recommended by many financial experts). You can’t borrow against term life insurance, but term premiums are much lower — rates start from just $11 per month with Bestow.
Consider Term Life Insurance
If you have cash value built up and can attentively monitor your loan payments, borrowing against life insurance can provide access to a little extra spending money when you need it. But if you’re not ready for all that and are simply looking for straightforward coverage, Bestow makes no-medical exam term life insurance ridiculously easy.
Apply online in minutes by filling out a stress-free questionnaire. You’ll get a quick decision — most people hear back on the same day. Upon approval, you can pick out your coverage amount, select a term, and name your beneficiaries. If you’re curious about just how affordable life insurance can be, start with a free quote here.
Bestow does not give tax or legal advice.The information provided is not intended to offer any tax, legal or financial advice. It is always a good idea to consult your tax, legal and financial advisors regarding your specific situation. Furthermore, this article does not ensure your eligibility for any specific product.
- Borrowing against your life insurance policy can be quicker and easier than taking out a traditional loan.
- You can borrow against whole life or permanent life insurance policies that meet your insurance company’s cash value requirements.
- While there are some advantages to taking out a life insurance loan, there are also a few risks. Be sure to research the process thoroughly and consider consulting with a financial advisor.