How to Borrow Against Your Life Insurance Policy

If you have a permanent life insurance policy with cash value, you may be able to borrow from it through a loan provided by your insurer. 

The loan you take on your policy is against the cash value it has, so while there’s no minimum amount to borrow, the maximum is typically 90% of your cash value. The loan collects interest but is generally not taxable and you can choose to pay it back whenever you want or not at all. If you choose not to repay the loan, the policy may default which can result in a loss of coverage, the cash value, and a taxes due on the amount you borrowed.

In this post, we’ll discuss when and how much you can borrow from a life insurance policy along with an overview of the process and explanation of the pros and cons. By having this information, you’ll be better equipped to decide if you should borrow from your life insurance policy.

What are the requirements for borrowing money from a life insurance policy?

The only requirement for borrowing money from your life insurance policy is that you have an eligible form of permanent insurance that has cash value. Eligible forms of insurance include whole life insurance, universal life insurance, and variable life insurance. Term life insurance policies do not allow you to borrow money since there’s no cash value, and thus nothing to take a loan against.

There’s no waiting period to borrow from your life insurance policy, you can borrow money from it as soon as you’ve built up enough cash value to cover the loan. However, it can take years to build sufficient cash value, and a larger loan means you might need to wait longer depending on how fast your cash value grows.

How much can I borrow from my life insurance policy?

Most insurers will allow you to borrow up to 90% of your policy’s cash value, but there is no minimum balance required to take a loan. For example, a policyholder with a cash value of $10,000 can borrow up to $9,000 while a policyholder with a cash value of $100,000 can borrow up to $90,000. 

The amount you can borrow is determined by the cash value of your policy, but you aren’t actually taking money from this account. Instead, you’re taking a loan from the insurance company and using the cash value as collateral. By doing so, the cash value can continue to grow from interest as you pay off the loan separately.

How to borrow from a life insurance policy

Borrowing against your life insurance is quick and easy. To start, you’ll need to contact your insurer and let them know you’re interested in a loan. Because the insurer has the policy’s cash value as collateral, the process can be informal and you won’t need an application or credit check. You may be asked to confirm your identity, sign a document, or allow your loan request to be recorded on a call — but it won’t be more complicated than that. After the insurer receives the loan request, the money will be deposited in your account or you’ll receive a check within a few days.

Do you have to repay a life insurance loan? 

You don’t have to repay a life insurance loan. However, any unpaid balance will be taken out of the death benefit when you die or your policy may lapse while you’re still alive. Keep in mind that the loan collects interest, so you’ll end up paying more than you borrowed. Furthermore, you may also have to pay taxes on the amount you borrowed.

If you choose to repay the loan, you can repay it at any time. Just know that interest will continue accumulating so it’s recommended to pay the interest plus part of the principal to lower the balance over time. If you just pay the interest, the principal will remain the same so you won’t pay off the loan.

Should I borrow from my life insurance policy?

Only you can decide if a life insurance loan is the right solution. Consider your goals for your life insurance, now and in the future, as you review the pros and cons below. 

Pros

• Quick and easy: You can apply for a life insurance without a credit check and get the funds quickly. 
• Protect Other Assets: Since your loan is tied to your policy’s cash value, you don’t have to put other assets like your home up as collateral.
• Low Interest: The rate for a loan on your life insurance will be less than if you go to the bank for a personal loan, typically between 5-8%.
• Flexible repayment schedules: You can choose your repayment schedule or whether you want to repay the loan at all.
• Generally Tax-Free: When you borrow from your life insurance policy, you won’t have to pay taxes unless the loan amount is greater than what you’ve paid in premiums. The exception would be if your policy is surrendered or lapsed, in which case the IRS would treat the loan as taxable income.

Cons

• Lower death benefit: If you don’t repay the loan, your beneficiaries will receive a lower death benefit.
• Risk of Lapsing the Policy: If you can’t make the monthly payments on a life insurance policy loan, the policy may lapse and you’ll lose coverage.
• Potential Tax Bill: If you borrow an amount that exceeds how much you’ve paid in premiums, or if your policy is lapsed or surrender — you’ll be taxed on your loan.

Alternatives to borrowing against life insurance

Borrowing from your life insurance policy through a loan is one way to tap into its value, but there are other options. Here are some alternatives to consider before taking on a life insurance loan.

1. Life settlement  

In a life settlement, you sell your life insurance to a third-party investor for cash. The transaction takes a few months to complete, but you will net far more cash than what’s available to you by borrowing through a policy loan. Sales prices can go up to 60% of the policy’s death benefit. 

Once the transaction closes, the new policy owner will control the death benefit and the cash value. That owner will also pay the policy premiums going forward. 

You may be eligible for a life settlement if you are at least 65 years old and your policy value is $75,000 or more. If you’re considering this route, use our Life Settlement Calculator to get a free estimate.

2. Policy surrender 

You could also surrender your policy back to the insurer. This would cancel your coverage and death benefit immediately. As part of that cancellation, the insurer would close out your cash value account and send you a check for the balance, less any surrender fees. 

Surrendering your policy makes the most sense when you’re too young for a life settlement and you can’t afford to keep the policy in force. This is because a life settlement can generate two to four times more cash than a surrender. That difference can add up to tens of thousands of dollars. If you aren’t quite 65, the potential for a larger life settlement payout may convince you to keep your life insurance for a few years until you can sell it. 

To learn more about life settlements and to find out what your policy might be worth, contact Harbor Life Settlements today. Our team is happy to review your coverage, answer your questions, and help you identify how to generate maximum cash from your life insurance policy.