Life insurance is seen as a safety net — a way to make sure your family is financially secure after you’re gone. But if you have the right kind of policy, it can be more than that. You can even borrow against your insurance.
Some life insurance policies even build up cash value over time and this is a surprisingly handy resource if — God forbid — you ever end up in one of those financial ditches.
While that may be true, borrowing against your life insurance isn’t something to do lightly. The risks and trade offs come with it.
Can you borrow money from Life Insurance?
The short answer? It depends on your policy. If you have a term life insurance policy, you’re out of luck—these don’t build cash value.
But if you’ve got a permanent policy, like whole life insurance, and you’ve been paying into it for a while, you might have some cash value built up that you can borrow against.
Keep in mind, though, that this isn’t “free money.” Borrowing against your life insurance means reducing the death benefit your loved ones will receive. And if you don’t repay the loan (plus interest), it could even cause your policy to lapse altogether.
Why borrow from Life Insurance?
People borrow against their life insurance for all kinds of reasons—maybe an unexpected bill popped up, or you need cash fast but don’t want to deal with a traditional loan.
Unlike bank loans, life insurance loans don’t require a credit check, and they don’t show up on your credit report.
The interest rates are often lower than other borrowing options, and you get to set a repayment schedule that works for you. Sounds good, right?
Well, not so fast. There are downsides too. To start, your policy could take years to reach a point where you can borrow against your cash value. After all, the loan can eat into the death benefit your family will count on.
In the worst-case scenario, the policy could lapse entirely if the loan balance (including interest) grows larger than the remaining cash value.
How much can you borrow?
The amount you can borrow depends on how much cash value your policy has. As more recent policies, they usually have very little cash value on them (on the rare occasions that there is one), so unless you only bought the policy a few years ago, you probably won’t be able to borrow anything.
In contrast, older policies usually have more value built up, and that’s a good thing when you are looking to borrow.
You will have to talk with your insurance company to determine how much you can borrow. The gist is that they’ll provide you with the details on how much your policy current cash value, the interest rate, and any fees involved.
What are the pros and cons?
Before having a loan against your policy, it’s advisable to get both the good and the bad. Here’s a quick rundown:
Pros:
Quick and simple access to cash: No credit checks or lengthy approval processes.
- Doesn’t affect your credit score: Since the loan isn’t reported to credit agencies.
- Flexible repayment terms: You can set your own schedule—or not repay at all, though that reduces the death benefit.
- Lower interest rates: Often cheaper than personal loans or credit cards.
Cons:
- Reduces the death benefit: If you don’t repay, your loved ones will get less money.
- Risk of losing the policy: If unpaid interest and the loan amount exceed your cash value, the policy could lapse.
- Takes time to build cash value: You might not have enough to borrow against for several years.
Paying off a life insurance loan: why it’s important
Let’s face it: Taking out a loan against your life insurance policy can be a lifeline when you’re in a tight spot. Paying it back isn’t mandatory, but it’s almost always the smartest decision for you and your loved ones.
Think about why you bought life insurance in the first place: to protect the people you care about. Now imagine this: Years from now, your loved ones will need the safety net you’ve created, only to find that part of it is missing.
That’s exactly what happens if you default on your loan. The amount you borrowed, plus interest, is deducted from your death benefit, leaving your family with less financial protection at a time when they need it most.
Paying off your loan restores that safety net so that your beneficiaries receive the support you intended to provide them.
The interest continues to grow as you let the loan go idle, like a snowball rolling downhill only growing larger and larger to stop. With time, compounding interest will pile up a balance large enough that it will begin to eat away at the cash value of your policy.
And what happens if the loan and interest together exceed the cash value of your policy? The policy lapses. It’s over.
How do you borrow against Life Insurance?
The process is pretty straightforward. First, check with your insurance company to see how much cash value you’ve built up and what the borrowing terms are.
If you decide to move forward, you’ll likely need to fill out some paperwork and provide a notarized signature to confirm your request. Once approved, you can usually have the money deposited into your bank account within a few days.
There’s another option too: some policies let you withdraw cash directly, rather than taking out a loan.
Just be careful—while withdrawals up to the amount you’ve paid in premiums are usually tax-free, anything above that could trigger taxes. On top of that, you can also withdraw the complete cash value policy of your life insurance, and hence it would become canceled.
Conclusion
Before you borrow, ask yourself a few key questions:
- Will this loan leave my family financially vulnerable if something happens to me?
- Are there hidden fees or unexpected costs I should be aware of?
- Do I have a clear plan for repaying the loan, or will it just add to my financial stress?
Borrowing against your life insurance should be treated like any other major financial decision: with caution and a solid plan. Emergencies happen, and having the option to access your policy’s cash value can be a lifesaver.
But don’t forget the primary purpose of your life insurance—to take care of your loved ones. Whatever you decide, make sure it’s a choice you’ll feel good about in the long run.
