How to Borrow Against Your Life Insurance Policy

Whether you can borrow depends on your policy type. Permanent life insurance policies build cash value over time, creating a pool of money you can borrow against. Term life insurance doesn't accumulate cash value, so borrowing isn't an option.

Whole, universal, variable and indexed universal life policies all build cash value. Cash value grows tax-deferred as you pay premiums, and you can borrow against it once you've accumulated a minimum amount. Most insurers require two to five years of premium payments before cash value reaches a borrowable threshold. This timeline varies based on premium amount and policy performance.

If you currently hold a term life insurance policy, check whether it includes a conversion option. Many term policies allow you to convert to permanent coverage without a medical exam, which would give you access to the cash value borrowing feature over time.

When you borrow against life insurance, you're taking a loan from the insurance company rather than withdrawing your own money. Your policy's cash value serves as collateral, which means the insurance company holds this value as security for the loan, similar to how a bank might hold your car title for an auto loan. Since your cash value serves as security, you won't need credit checks or income verification.

Your cash value continues earning interest or dividends while the loan remains outstanding. The loan balance grows with interest and reduces your death benefit dollar-for-dollar until repaid. Unlike traditional loans where you might lose the collateral if you default, your life insurance policy remains in force as long as the loan balance doesn't exceed the cash value.

Insurers don't require a payment schedule. You control when and how much you pay back. This flexibility makes life insurance loans attractive for people who need funds but want to avoid the rigid payment requirements of traditional loans.

You can borrow immediately once your cash value reaches the insurer's minimum threshold. The timeline to build sufficient cash value varies based on policy type, premium payment amount and policy performance for variable or indexed products.

Most policyholders need two to five years of premium payments to build enough cash value for a small loan. Larger borrowing amounts require five to 10 years or more based on premium amount and policy type. Policies with a paid-up additions rider (an option that uses dividends to buy more coverage) or single-premium life insurance policies build cash value faster since they fund the entire policy upfront.

Most insurance companies allow borrowing against life insurance up to 90% of your accumulated cash value. Most companies don't set a minimum loan amount. You can borrow small amounts for immediate needs or larger sums for major expenses.

Your loan limit varies based on your built-up cash value, policy type, insurer rules and any existing outstanding loans. A policy with $50,000 in cash value provides up to $45,000 in loan potential. A $100,000 cash value offers up to $90,000 in borrowing capacity. These amounts are maximums, and borrowing less helps maintain a buffer against potential policy lapse.

Borrowing limits and terms vary by state and insurer. Check with your insurance company for exact terms. Some states have additional consumer protections for life insurance loans. Check your state's insurance department website for regulations.

Insurance companies don't require a mandatory repayment schedule for life insurance loans, but creating a strategic approach protects your policy and death benefit. Your repayment choice affects how quickly you restore coverage and whether your policy stays in force.

You don't have to pay life insurance loans back. You can carry a balance indefinitely, but unpaid loans create consequences that compound over time.

Interest continues accruing on your outstanding balance, causing the loan amount to grow year after year. Your death benefit decreases by the loan balance plus accumulated interest. If your total loan balance exceeds your cash value, your policy will lapse, terminating your coverage entirely.

Dying with an outstanding loan means your life insurance beneficiaries receive a reduced payout. The insurer deducts the loan balance plus any accrued interest from the death benefit before paying your beneficiaries. A $500,000 policy with a $100,000 outstanding loan would pay $400,000 to your beneficiaries.

Policy lapse triggers both coverage termination and potential tax consequences. You may owe income tax on any gains if your cash value plus the loan amount exceeded your total premium payments.

Life insurance loans give permanent policyholders flexible, low-interest access to cash with no credit checks or mandatory repayment schedules. To get one, verify your policy type, confirm your cash value, review loan terms and submit a simple request form.

Outstanding loans reduce your death benefit and can cause policy lapse if your balance grows too large. A repayment plan, even an informal one, protects your coverage and your beneficiaries.

Talk to your insurance agent or a financial advisor to see if a policy loan fits your situation.