Things They Don’t Tell You: You May Be Able to Borrow Money From Your Life Insurance Policy

When people need money, they usually think about credit cards, payday advances, personal loans, or borrowing from family. But there may be another option sitting right inside your life insurance policy.

Certain life insurance policies build cash value that the policy owner may be able to borrow against while they are still alive. However, this does not apply to every policy, and borrowing is not free money.

What Types of Life Insurance Build Cash Value?

Policies that may build cash value include:

  • Whole life insurance
  • Universal life insurance
  • Variable life insurance
  • Certain other permanent life insurance policies

Term life insurance usually does not build cash value. It generally provides coverage for a specific number of years and pays a benefit only if the insured person dies while the policy is active.

How Does a Life Insurance Loan Work?

As you pay premiums on a permanent life insurance policy, part of that money may help build cash value over time. Once enough value has accumulated, the policy owner may be allowed to borrow against it.

The insurance company determines how much is available based on the policy’s cash value, loan value, existing loans, and other policy terms.

A policy loan may not require the same credit check or approval process as a traditional bank loan because the policy’s cash value secures the money. However, the insurance company will normally charge interest.

Questions to Ask Before Borrowing

Contact your insurance company and ask:

  1. Does my policy currently have cash value?
  2. How much money is available to borrow?
  3. What interest rate will I be charged?
  4. Will interest be added to the loan balance?
  5. Will borrowing affect my monthly premium?
  6. How will the loan affect the death benefit?
  7. Could the policy lapse if I do not repay the loan?
  8. Are there any possible tax consequences?

Ask for the answers in writing so you understand exactly how the loan would affect your specific policy.

Do You Have to Repay the Loan?

Some insurance companies may not require scheduled monthly payments. That does not mean the loan disappears.

Interest can continue accumulating while the balance remains unpaid. If the insured person dies before the loan is repaid, the remaining balance and interest may be deducted from the death benefit. That means the beneficiaries could receive less money than originally expected.

If the unpaid balance becomes too large compared with the policy’s cash value, the policy could also lapse or terminate. Depending on the circumstances, a lapsed or surrendered policy with an outstanding loan could create tax consequences.

Is Borrowing From Your Policy a Good Idea?

It may be helpful during an emergency or when other borrowing options carry extremely high fees. However, you should compare the policy loan’s interest rate and long-term consequences with your other choices.

Never borrow without knowing:

  • The complete cost of the loan
  • How quickly interest will accumulate
  • Whether you can continue paying your premiums
  • How much the death benefit could be reduced
  • What happens if the loan is never repaid

The most important thing to remember is that you are borrowing against money intended to protect your family. Treat the decision seriously and avoid taking more than you truly need.

Before applying for another expensive loan or cash advance, check whether your permanent life insurance policy has cash value. You may discover an option you did not know was available—but make sure you understand the cost before using it.

For additional consumer information, visit the National Association of Insurance Commissioners Click here

Disclaimer: This information is for educational purposes only and is not financial, tax, legal, or insurance advice. Policy rules vary. Contact your insurance company and speak with a qualified professional about your individual situation.

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