Can you borrow money from your life insurance?

Yes, you can borrow money from certain types of life insurance policies, specifically permanent life insurance policies like whole life and universal life insurance. These policies build cash value over time, which allows policyholders to borrow against it. Here’s how it works and what you need to know.

1. How Does Borrowing from Life Insurance Work?

When you have a permanent life insurance policy, a portion of your premiums goes into a cash value account. Over time, this cash value grows, and once it reaches a certain level, you can borrow against it.

• No Credit Check Required: Unlike traditional loans, borrowing from your life insurance policy doesn’t require a credit check or approval process, as the cash value acts as collateral for the loan.
• Flexible Repayment: You can choose to repay the loan at your own pace. However, unpaid loans will accrue interest, and if not repaid, they will reduce the death benefit that your beneficiaries receive.
  
  

2. Benefits of Borrowing from Life Insurance

• Quick Access to Cash: One of the primary advantages of borrowing from life insurance is the ability to access funds quickly without going through a formal loan application process.
• No Tax on Loans: Life insurance loans are generally not considered taxable income as long as the policy remains active.
• Lower Interest Rates: The interest rates on life insurance loans are often lower than those for other personal loans or credit cards.
  
  

3. Drawbacks of Borrowing from Life Insurance

• Reduced Death Benefit: If you don’t repay the loan, the amount you borrowed, plus any accrued interest, will be subtracted from the death benefit paid to your beneficiaries.
• Policy Lapse Risk: If the loan balance plus interest exceeds the policy’s cash value, the policy could lapse, meaning you lose the coverage and any remaining cash value.
• Loan Interest: Although you’re borrowing from your own policy, interest is still charged on the loan, and it will continue to accrue until the loan is repaid.
  
  

4. Which Policies Allow Borrowing?

Only permanent life insurance policies with a cash value component allow borrowing. Term life insurance does not build cash value, so you cannot borrow from term policies.

• Whole Life Insurance: Builds cash value over time, which can be accessed through loans.
• Universal Life Insurance: Offers more flexible premiums and also accumulates cash value, allowing for borrowing.
  
  

5. How Much Can You Borrow?

The amount you can borrow is typically up to 90% of the policy’s cash value, depending on the terms of your policy. The cash value must have accumulated sufficiently before borrowing is possible.

6. What Happens If You Don’t Repay?

If the loan remains unpaid at the time of your death, the outstanding balance, plus any interest, will be deducted from the death benefit. This means your beneficiaries will receive a reduced payout.

Borrowing money from your life insurance is possible with whole or universal life insurance policies that build cash value. It offers quick access to funds with flexible repayment terms, but it comes with risks such as reducing your death benefit or causing the policy to lapse if not managed carefully. Always consult with your insurance agent or financial advisor before borrowing to ensure it’s the right choice for your financial situation.