For many people, debt is a constant source of stress. From student loans and credit card balances to mortgages and medical bills, nearly every life stage brings the risk of financial strain. And for seniors living on fixed retirement incomes, debt can feel especially overwhelming.
But it doesn’t have to be. Life insurance policies—particularly those with a cash value component—can offer a way out. By borrowing against your life insurance, you may be able to access funds to pay down your debt without jumping through the usual hoops of traditional loans. In this guide, we’ll walk you through how borrowing from your life insurance works, who qualifies, how to start the process, and the pros and cons to consider before you decide.
Key Takeaways
- You can only borrow against permanent life insurance policies that build cash value—not term policies.
- Borrowing from your life insurance is a quick, low-hassle way to access cash without a credit check.
- You’re not required to repay the loan, but any unpaid amount will be deducted from your death benefit.
- Check with your insurer and request an in-force illustration to find out how much you can borrow.
- If borrowing isn’t a good fit, you may also consider a life settlement, which could provide a higher payout.
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.
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.
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.
How to Borrow Against Life Insurance to Pay Off Debt
If you’re thinking about using your life insurance to pay down debt, 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.
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.
How Much Can You Borrow?
The amount you can borrow depends on your policy’s accumulated cash value. 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.
What Kinds of Debt Can You Pay Off?
You can use the money from a life insurance loan for almost any type of debt, including:
- Credit card debt
- Medical bills
- Personal loans
- Student loans
- Mortgage or housing payments
- Bank loans or other high-interest debt
Many people use policy loans to tackle their most urgent or high-interest obligations first. But ultimately, the decision is yours. There are no restrictions on how the money is used.
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.
Alternative Option: Selling Your Policy in a Life Settlement
If a policy loan doesn’t offer the amount you need or you need an alternative funding strategy, you might consider selling your existing life insurance policy through a transaction known as a life settlement.
In a life settlement, you sell your life insurance to a licensed third party. In exchange, they take over the premiums and become the new beneficiary. You receive a lump-sum cash payment—often far more than the policy’s cash surrender value.
This option can be especially helpful for seniors or those facing large expenses. If you’re interested in learning more, Coventry Direct specializes in helping policyowners explore life settlements. Their team can walk you through the process and help you find out how much your policy is worth.
Ready to explore your options?
Contact Coventry Direct to learn more about borrowing from your policy—or selling it for a lump sum through a life settlement.
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.
