Can You Borrow Money From a Life Insurance Policy?
Life Insurance Is Not Only About What Happens After Death
Shanti
9/10/20262 min read
Can You Borrow Money From a Life Insurance Policy?
Many people think of life insurance only as a way to financially protect their family after death. However, some types of life insurance can also build financial value during your lifetime and may even allow you to borrow money from the policy.
Can You Borrow From Any Type of Life Insurance?
No. This option is generally available with permanent life insurance policies that build cash value, such as certain Whole Life and Universal Life policies.
Term Life Insurance typically does not build cash value, so you generally cannot borrow against it in this way.
How Does a Life Insurance Loan Work?
Over time, a permanent life insurance policy may accumulate cash value. Once enough cash value has built up, depending on the insurance company and the terms of the policy, you may be able to borrow against it.
One important difference between this type of loan and a traditional bank loan is that the process is often simpler. You may not need a credit check, proof of income, or the usual approval process required for a traditional loan.
What Are the Potential Benefits?
Borrowing against the cash value of a life insurance policy may provide relatively quick access to money, and there are generally few restrictions on how the funds can be used. Repayment may also be more flexible than with many traditional loans.
However, borrowing from your life insurance policy does not mean you are withdrawing money for free. Policy loans charge interest, and if the loan is not managed properly, it can affect your policy.
The Most Important Thing to Know
If the loan and accumulated interest remain unpaid, the amount eventually paid to your beneficiary may be reduced.
In certain situations, if the outstanding loan balance becomes too large compared with the policy’s cash value, the policy could lapse. This may also create potential tax consequences.
Before taking a policy loan, do not only ask: “How much can I borrow?”
You should also ask: “How could this loan affect my cash value, death benefit, and life insurance policy over the long term?”
When Can You Borrow From Life Insurance?
Generally, your policy must first accumulate enough cash value. With a new life insurance policy, it may take several years before sufficient cash value is available for borrowing.
The amount you can borrow, the interest rate, and repayment terms will depend on the insurance company and the specific policy.
Life Insurance Is Not Only About What Happens After Death
This is one reason why understanding the different types of life insurance is so important. Term Life, Whole Life, and Universal Life can have very different structures, costs, benefits, and purposes.
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