Life insurance does more than provide financial protection for your loved ones – it can also serve as a flexible financial tool while you’re still alive. If you own a permanent life insurance policy with a cash value component, it’s possible that you can borrow against your policy and access funds when you need them most.
Whether you’re looking for extra cash to cover unexpected expenses, supplement your retirement income, or simply create a financial safety net, borrowing from your life insurance policy can be a convenient option. Unlike traditional loans, policy loans typically don’t require credit checks, applications, or lengthy approval processes.
In this guide, we’ll explain how borrowing from your life insurance policy works, who qualifies, what the borrowing process looks like, and the pros and cons to weigh before taking out a loan against your coverage.
Key Takeaways
- You can only borrow against permanent life insurance policies that build cash value – not term life insurance.
- Borrowing from your life insurance policy provides quick, low-hassle access to cash with no credit check or lengthy application process.
- Policy loans typically carry 5–8% interest, and repayment is flexible – but unpaid balances reduce your cash value and death benefit.
- If a loan grows larger than your policy’s cash value, your coverage may lapse, which can trigger taxable income on the outstanding loan amount.
- You’ll need to be the policyowner, have premiums paid and current, and have enough cash value built up – usually after 2–5 years – to qualify for borrowing.
- Requesting an in-force illustration from your insurer will show how much you can borrow and how the loan will affect your policy over time.
- Alternatives include personal loans, HELOCs, and retirement account withdrawals. If you no longer want the policy, a life settlement may offer a far higher payout than borrowing or surrendering
Can You Borrow Against a Life Insurance Policy?
Yes, borrowing against a life insurance policy is not only possible—it’s a common financial strategy for those with the right type of policy. If you have a permanent life insurance policy that builds cash value (like whole life or universal life), you may be eligible to take out a loan using that cash value as collateral.
To qualify for a policy loan, you must be the policyowner, have a permanent life insurance policy with enough accumulated cash value, and have kept your premiums current so the policy remains in good standing.
Unlike other types of loans, policy loans don’t require credit checks or long applications. There’s no need to explain how you’ll use the money, and there are no mandatory monthly payments. You’re only required to pay the interest, but even that can be deferred if you choose.
If you don’t repay the loan, the unpaid amount (plus interest) will simply be deducted from your policy’s death benefit when you pass away. In other words, the money comes out of what your beneficiaries would receive. However, if you do repay the loan, that money is reinvested in your policy, essentially paying yourself back.
If the loan balance plus interest ever exceeds your policy’s available cash value, the policy may lapse. If that happens, the IRS may treat the outstanding loan amount as taxable income, which could result in an unexpected tax bill.
One important note: you can’t borrow against term life insurance. Term policies don’t build cash value, so there’s nothing to borrow against. Most permanent life insurance policies, on the other hand, take two to five years to build enough cash value to become eligible for borrowing.
How to Borrow Against Life Insurance
If you’re thinking about borrowing from your life insurance policy, the process is typically straightforward. Here’s how to get started:
- Contact your insurer. Reach out to your life insurance company and ask to speak with someone about a policy loan. They’ll confirm whether your policy is eligible and can explain your options.
- Request an in-force illustration. This is a document that shows your policy’s current cash value and projected growth. It will help you understand how much money is available to borrow and how the loan will affect your policy’s future value and benefits.
- Submit a loan request. If you’re eligible and decide to move forward, your insurer will send you a simple form to complete. You’ll include your name, policy number, and how much you’d like to borrow. Once approved, most policyowners receive a check or direct deposit in about a week, though the full approval process may take two to three weeks, depending on the insurer.
What Types of Life Insurance Policies Allow Borrowing?
Only permanent life insurance policies qualify for borrowing. These include:
- Whole life insurance
- Universal life insurance
- Variable life insurance (depending on the policy terms)
These policies accumulate cash value over time, which you can borrow against. If you have a term life insurance policy, you won’t be able to take out a policy loan because term policies do not build cash value. Insurers may also require a minimum amount of cash value before allowing a loan, and minimum loan amounts can vary.
How Much Can You Borrow from Your Life Insurance Policy?
The amount you can borrow depends on your policy’s accumulated cash value, not the death benefit. Generally, you can borrow up to 90% of your policy’s cash value, though this may vary by insurer.
To find out the specific amount, your insurer can provide an in-force illustration showing your available cash value and how it would change if you borrow.
Many insurers also set a minimum borrowing threshold, meaning your available cash value must exceed their required minimum before a loan can be issued. For example, a $100,000 whole life policy might accumulate $15,000–$20,000 in cash value after 10–15 years, depending on premium payments and the policy’s interest-crediting rate. This cash value – not the death benefit – is what determines your borrowing limit.
What Are Typical Interest Rates for Life Insurance Loans?
Life insurance policy loans generally carry interest rates between 5% and 8%, depending on your insurer and policy type. These rates tend to be more competitive than credit cards or unsecured personal loans, making policy loans an appealing option for policyowners who want quick access to cash without credit checks or lengthy applications.
What Happens If You Don’t Repay the Loan?
Life insurance loans do not require monthly payments, and repayment timing is completely flexible. However, interest continues to accrue. If the total loan plus interest ever grows larger than your policy’s cash value, your policy may lapse, permanently ending your coverage.
If the policy lapses – or if you surrender the policy with an outstanding loan – the IRS may consider the unpaid loan amount to be ordinary taxable income.
Pros and Cons of Borrowing Against Life Insurance
Before you take out a policy loan, it’s important to weigh the benefits and trade-offs. Here’s a breakdown to help you decide if it’s the right move for you:
Pros:
- No credit check or approval process.
You don’t need a good credit score to qualify. - No questions asked.
Use the money however you like—no restrictions, no explanations. - Fast access to funds.
Once approved, you’ll typically receive the money within a week. - Tax-free borrowing.
As long as your policy isn’t classified as a Modified Endowment Contract (MEC), policy loans are not taxed. - Repayment flexibility.
You’re not required to repay the principal. If you choose to repay, the money goes back into your policy. - Simple process.
A few forms and a quick conversation with your insurer are all it takes.
Cons:
- Reduced death benefit.
If you don’t repay the loan, your beneficiaries will receive less from your policy. - Interest charges.
Loans accrue interest, which can be substantial over time. - Policy maintenance required.
You still need to pay your premiums, or the policy may lapse. - Loss of creditor protection.
In some states, a life insurance death benefit is protected from creditors, but loan proceeds may not be.
Alternatives to Borrowing From Your Life Insurance Policy
Borrowing against your life insurance policy can be a convenient option, but it isn’t the right choice for everyone. If you’re looking for other ways to access funds or want to compare all your options before taking a policy loan, here are several alternatives to consider:
Home Equity Loans or HELOCs
If you own a home, a home equity loan or a home equity line of credit (HELOC) may offer lower interest rates than unsecured borrowing. These loans use your home as collateral and may provide access to larger sums of money. However, they also carry the risk of foreclosure if you’re unable to make payments.
Personal Loans
A personal loan from a bank, credit union, or online lender can provide quick access to cash without tapping into your life insurance policy. Rates vary depending on your credit score and income, but repayment terms are structured and predictable.
Credit Card Cash Advances
A cash advance can give you immediate funds, but it typically comes with much higher interest rates and fees. This option is generally best reserved for short-term or emergency situations due to its high cost.
Borrowing From Retirement Accounts
Some people consider borrowing from a 401(k) or taking withdrawals from an IRA. While these options may provide liquidity, they can come with tax consequences, penalties, or risks to your long-term retirement stability. This approach should be used cautiously.
Considering a Life Settlement Instead
If you no longer want, need, or can afford your life insurance policy, borrowing against it may not be the optimal solution. In many cases, a life settlement, that is, selling your policy to a licensed third-party buyer, can provide a much higher payout than borrowing or surrendering the policy, especially for older policyowners or those with expiring or unaffordable permanent coverage.
A life settlement allows you to receive a lump-sum cash payment, eliminate future premium obligations, and unlock value that might otherwise go unused. For many, it’s a financially strategic alternative that offers both flexibility and immediate relief.
Explore Your Policy’s Value With Coventry Direct
If you’re starting to rethink whether your life insurance policy still fits your needs, you’re not alone. Many policyowners discover that selling their policy provides far more financial freedom than borrowing against it or letting it lapse. Coventry Direct has helped thousands of people understand their options and uncover the true market value of their policies – often receiving significantly more than they expected.
Whether you’re looking for immediate cash, trying to eliminate premium payments, or simply exploring alternatives, our team can guide you through the life settlement process with clarity and confidence. Get a free, no-obligation estimate today and see how much your life insurance policy could be worth.
FAQs
Common questions about borrowing against a life insurance policy.
How soon can I borrow against a life insurance policy?
You can usually borrow once your policy has built enough cash value, which typically takes a few years. The exact timing depends on your policy type and how long you’ve been paying into it – check with your insurer to see if you’re eligible.
What types of life insurance policies can I borrow against?
You can borrow against permanent life insurance policies that build cash value, such as whole life, universal life, and variable life insurance. These policies accumulate value over time, which you can use as collateral for a loan.
Can I borrow against a term life policy?
No, you can’t borrow against a term life policy because it doesn’t build cash value. Term policies offer coverage for a ser number of years, but they don’t include a savings component.
Can I borrow against a whole life policy?
Yes, whole life insurance is one of the most common types of policies used for borrowing. As long as you’ve built up enough cash value, you can take out a loan against it–no credit check or income verification required.
Should I pay off my life insurance loan?
It depends on your goals and financial situation. You’re not required to pay off a life insurance loan on a set schedule, but the balance continues to grow with interest. Paying it off can help restore your policy’s full cash value and death benefit. If you leave the loan unpaid, the insurer will deduct the outstanding amount, plus interest, from your policy’s death benefit. And if the loan ever grows larger than your cash value, your policy could lapse and potentially trigger a tax bill. If keeping the policy isn’t important to you anymore, you may want to explore whether selling it through a life settlement is a better option than repaying the loan.
