When financial needs arise, some policyholders look to their life insurance for support. Borrowing against your policy can be a smart way to access cash without undergoing a credit check, but it’s not the only option. In this guide, we’ll break down the best life insurance policies to borrow against, how cash value works, and why selling your policy might be an even better solution in some cases.
Key Takeaways
- What is the best life insurance policy type to borrow against? Whole life and universal life insurance policies are generally considered the best types to borrow against because they build cash value over time.
- What makes whole life and universal (UL) life insurance the best to borrow against? These permanent life insurance policies offer stable and predictable growth, as well as accessible policy loans.
- How would you borrow against a life insurance policy? Borrowing against a life insurance policy involves tapping into your cash value through a loan from your insurer, often with low interest rates and flexible repayment options.
What is the Best Life Insurance Policy to Borrow Against?
The best life insurance policies to borrow against are whole life and universal life policies. These are permanent life insurance policies, meaning they don’t expire after a term, and they build cash value over time.
Whole life insurance offers guaranteed growth of the cash value, while universal life insurance provides more flexibility in premium payments and interest crediting. Both options allow policyholders to access loans against the policy’s cash value, often with low interest rates and no credit checks.
However, borrowing isn’t always the most strategic choice. In some cases, selling your life insurance policy can offer more value, especially if you no longer need the coverage or are concerned about loan repayment. Learn how to get started with selling your policy.
Understanding Cash Value in Life Insurance
Cash value is a critical component of permanent life insurance policies. It grows over time and serves as the foundation for policy loans.
What is Cash Value?
Cash value is a living benefit of permanent life insurance policies. As you pay your premiums, a portion of the payment is allocated to a savings-like account that grows over time, either at a fixed rate or based on market performance (depending on the policy type). This accumulated value is what you can borrow against or sell.
If you’re considering accessing this value, selling your life insurance policy might provide a higher payout, especially if your policy has significant value and you no longer need the coverage.
How Cash Value Works
Cash value builds through premium contributions, interest accumulation, and sometimes dividends (for participating whole life policies). It typically takes several years for the cash value to be large enough to borrow against. Once it’s built up, you can access this value via a policy loan or by surrendering the policy; however, selling it could offer more value in certain cases.
Types of Life Insurance Policies to Borrow Against
Here’s a breakdown of the most common life insurance policies that allow borrowing and how they differ:
Whole Life Insurance
Whole life insurance offers fixed premiums, guaranteed death benefits, and steady cash value growth. This predictability makes it one of the most popular choices for borrowing. However, it’s essential to assess whether taking out a loan or selling the policy will better meet your financial needs.
Universal Life Insurance
Universal life policies are more flexible than whole life policies, offering adjustable premiums and interest rates tied to a declared rate or an index. While these policies are also solid for borrowing, their cash value may grow more slowly, especially in the early years. That said, the flexibility they offer can make them a strong candidate, especially if you’re considering selling the policy instead of borrowing.
Variable Life Insurance
Variable life policies invest part of your premium into sub-accounts (similar to mutual funds). This gives the potential for faster cash value growth, but also exposes you to market risk. While borrowing is possible, the value of your loanable cash will fluctuate. For policyholders with substantial value, selling the policy might present a safer option.
Universal Variable Life Insurance
This policy combines the flexibility of universal life insurance with the investment potential of variable life insurance. It may offer higher returns, but also higher volatility. If the cash value is unstable or unpredictable, a life settlement may be a more appealing option than a policy loan.
Convertible Term Life Insurance
Term policies generally do not build cash value, meaning you can’t borrow against them directly. However, convertible term life insurance allows you to change your term policy into a permanent one, which then starts accumulating cash value. Once converted, you may have the option to borrow or sell the policy, depending on its value.
Policy Loans: Process and Considerations
Before borrowing from your policy, it’s important to understand the steps involved and the pros and cons.
How to Take Out a Policy Loan
Taking out a policy loan is a relatively straightforward process. Contact your insurer to request a loan, and they’ll verify the cash value of your policy. If there’s enough value available, you can usually borrow up to 90% of it. There is no credit check or lengthy approval process, and you can receive funds within a few business days.
Benefits of Policy Loans
Policy loans come with several benefits:
- No credit impact: Since you’re borrowing from your own policy, there’s no credit check required.
- Low interest rates: Interest rates on policy loans are typically lower than those on traditional loans.
- Tax-free access: As long as the policy remains in force and is not surrendered, borrowed funds are typically not considered taxable income.
Risks and Impact on Death Benefit
If you don’t repay the loan, the outstanding balance (plus interest) will be deducted from the death benefit. Over time, unpaid interest can compound and even cause the policy to lapse. That’s why many policyholders explore selling their policy, especially if they no longer need the coverage and want to avoid the risk of policy lapse.
Conclusion
Borrowing against your life insurance policy can be a smart financial move, especially if you have a whole or universal life policy with enough cash value. But it’s not without risks. Loans can reduce your death benefit, and if left unpaid, may lead to policy termination.
That’s why it’s important to explore all your options. In many cases, selling your life insurance policy can offer a larger cash payout without the need to repay a loan. If you’re ready to explore your options, get started today with Coventry Direct and see how much your policy could be worth.
