How to Borrow from Life Insurance

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. This cash value grows tax-deferred as you pay premiums, and you can typically borrow against it once you've accumulated a minimum amount. Most insurers require 2-5 years of premium payments before your cash value reaches a borrowable threshold, though this timeline varies based on your premium amount and how well your policy does.

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 take a loan from life insurance, you're borrowing from the insurance company, not 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. The insurance company uses your cash value as security, which means you won't need credit checks or income verification.

Your cash value continues earning interest or dividends while the loan remains outstanding. This differs from a bank savings account, where a withdrawal reduces your earning balance. Your loan balance grows with interest. The outstanding loan balance reduces your death benefit dollar-for-dollar until repaid.

No mandatory repayment schedule exists. 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.

No waiting period applies once your cash value reaches your insurer's minimum threshold. The timeline to build sufficient cash value depends on your policy type, premium payment amount and policy performance for variable or indexed products.

Most policyholders need at least two to five years to build enough cash value for a small loan. Substantial borrowing typically requires 5-10 years or more, depending on your premium amount and policy type. Options to accelerate cash value growth include adding a paid-up additions rider to your policy or buying a single-premium life insurance policy, which funds the entire policy upfront.

Most insurers allow borrowing up to 90% of your accumulated cash value. No minimum loan amount exists with most companies, giving you flexibility to borrow small amounts for immediate needs or larger sums for major expenses.

Your loan limit depends 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 represent maximums, and borrowing less helps maintain a buffer against potential policy lapse.

Borrowing limits and terms may vary by state and insurer. Check with your specific insurance company for exact terms.

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 offer permanent policyholders flexible, low-interest access to cash without credit checks or mandatory repayment schedules. The process involves verifying your policy type, confirming your cash value, reviewing loan terms and submitting a simple request form.

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

Consider consulting with your insurance agent or a financial advisor to determine whether a policy loan fits your situation.