How to Borrow Money From Your Life Insurance Policy

When to Consider Borrowing From Your Life Insurance Policy

You can borrow from your life insurance policy if you have permanent life insurance that has a cash value component. Cash value increases as you make premium payments. You'll typically have to wait at least two to five years to have enough cash value accrued to borrow against it. Once you do, here are some scenarios when a life insurance loan is worth considering:

• You're facing a financial emergency. If you need cash and don't have enough in your emergency fund, borrowing from a life insurance policy is typically less costly than taking out a personal loan or using a credit card. You won't be able to get the cash immediately, though, as it could take several weeks to receive the money from your insurer.
• You want to avoid using other assets. A major advantage of borrowing against life insurance cash value is that you won't risk the loss of other assets—like your house, if you were to use a home equity loan or home equity line of credit (HELOC). Your cash value functions as collateral for the loan.
• You'd benefit from the flexibility of this type of loan. Borrowing from a life insurance policy allows you to skip a credit check, and you can use the money for anything you choose. You can also repay the loan as quickly or as slowly as you want, though not paying it back at all could have consequences such as income taxes and a lower death benefit payout.

Pros and Cons of Borrowing From Your Life Insurance Policy

There are significant pros and cons of taking out a loan from your life insurance policy. Consider the following before moving forward.

How Do Life Insurance Loans Work?

Life insurance loans are backed by the cash value of your policy, and can be repaid over time on a schedule that you choose. That means they work a little differently than other types of installment loans, such as a personal loan or car loan. They're also not a line of credit like a credit card or HELOC.

Instead, you can borrow an amount that you qualify for based on the accumulated cash value and your insurer's limits. You'll then pay off the loan, with interest, over time. It's best to continue making premium payments so that you keep building up cash value and keep the policy active. You're not at risk of paying late fees or having late payments reported to the credit bureaus—but it could be pricey, and problematic for your beneficiaries, if you don't pay back the loan as agreed.

How Much Can I Borrow From My Life Insurance Policy?

Generally, life insurance companies allow you to borrow up to 90% of the cash value of your policy (not the death benefit). As you pay premiums, a portion of those premiums add up each month to the cash value, which eventually equals the value of the policy.

Example: Let's say you have a $500,000 policy, and you have $50,000 in accumulated cash value. Your insurer may allow you to borrow up to $45,000 from your policy. Any amount you don't pay back could be deducted from the $500,000 your beneficiaries would have been entitled to as a death benefit.

How to Borrow Money From Your Life Insurance Policy

Getting a life insurance loan is easier than accessing other types of credit. Here's how to do it:

1. Make sure you're eligible. Confirm you have a permanent life insurance policy with cash value, and that you've built up enough cash value through your premium payments to borrow the money you need.
2. Contact the insurance company. Let the insurer know you want to request a loan, either online or by phone, and for how much.
3. Access the funds. The insurer will provide you with the loan, and you can use the funds as you wish. The money you've borrowed will accrue interest.
4. Repay on your own timeline. There's no specific repayment term or monthly payment. But it's wise to come up with a plan for repaying the loan so that you don't risk losing the policy or compromising your beneficiaries' death benefit.

Learn more: Benefits of Life Insurance While You're Alive

Do Life Insurance Loans Have to Be Repaid?

Life insurance loans have to be repaid if you want to avoid tax consequences and ensure your beneficiaries receive the full death benefit.

Life insurance payouts themselves aren't taxable. But you could pay tax as the result of an unpaid life insurance loan. If you don't repay, the loan balance—including principal and interest—will eventually equal and exceed the cash value of the policy. The insurer will cancel the policy and pay off your loan balance with the money remaining in your policy. You could then owe income taxes on any investment earnings in the account.

Plus, the insurer will pay a lower death benefit to your beneficiaries if you have an outstanding life insurance loan. The death benefit will be reduced for every dollar of principal and interest remaining to be paid.

The Bottom Line

Life insurance loans can be a flexible, accessible way to get cash in an emergency or to support you through a difficult period financially. But even though they come with few restrictions and no specific repayment timeline, make a plan to pay off the loan as you would any other. That will ensure you get all the benefits of a life insurance policy without unforeseen tax payments or a reduced payout.