Can You Borrow Against Life Insurance? Find Out How

Most of the people when thinking about the life insurance policy might think that this is something that only comes to happen after you pass away and this will help your family financially in difficult situations when you will not be there to help them. But did you know that some life insurance policies can actually help you while you’re still alive?

If you have taken the right type of policy, you will be able to borrow money from it.The interest is usually low, and you can pay it back when you’re able. This can really help you if you have a big expense like if you have a doctor’s bill to pay, college costs, or repairing your house and you don’t want to use a credit card or get a regular loan.

Here is everything you need to know about how to borrow from life insurance.

We will explain which types of policies let you do it, how much money you can take out, how it all works, and what things you should be careful about. We’ll also answer common questions people usually have, using easy words and real-life examples so it’s simple to understand.

What Does It Mean to Borrow from Life Insurance?

Borrowing money from a life insurance policy means that you are taking a loan using the money that your policy has saved over time. This thing is only possible with some of the policies that build cash value. The insurance company will let you use that money, and they hold it as a guarantee that is called collateral.

This is like borrowing from yourself because there is no credit check, also no stick plans and the interest is very low compared to the credit cards and others personal loans 

Can You Borrow Against Life Insurance?

Yes, you can borrow from a life insurance policy, but there are some conditions. Let’s take a look at what they are.

Policies That Allow Borrowing

Here are the type of life insurance policies that allow you to borrow;

Whole Life Insurance

As long as you keep paying every month, whole life insurance covers you for your whole life. Over time, it saves up money that grows steadily, and you can borrow this money if you need to.

Universal Life Insurance

This type of life insurance allows you to adjust the monthly payments that how much you pay each month. It also saves up cash value over time that you can use or borrow when you need it.

Variable Life Insurance

This type of life insurance lets you grow your cash value by investing it in things like stocks or mutual funds. It can grow faster than other policies but only if the market is going well but if the market goes down, your cash value can also drop.

Indexed Universal Life Insurance (IUL)

This type of insurance grows cash value based on how the stock market is going using an index like the S&P 500. It can grow more than other policies, but there are limits on how much you can earn or lose.

All of these are permanent life insurance policies, which means they don’t expire as long as you are paying your monthly payments and they all build cash value you can borrow from.

Policies That Do Not

Term Life Insurance 

A very common question is, “Can you borrow from term life insurance?” The answer is no. Term life only provides a death benefit. It doesn’t build any cash value. So, there is no money saved up that you can borrow in the future.

Working of Life Insurance Borrowing

1. Build Cash Value

Permanent life insurance policies like whole life insurance and universal life insurance build cash value over time, usually start within the first few years of the policy begins. The longer you keep the policy active, the more cash value it will have.

2. Request a Loan

Once your cash value grows enough, you can ask your insurance company for a loan. Usually, it’s a very simple and easy process that just requires filling out a form or making a request online to a company.

3. Receive Funds

You usually get the money all at once, and you can use it for anything like medical bills, school costs, emergencies, or even investments.

4. Repay (or Don’t)

You can pay back the loan whenever you want. But keep one thing in mind, interest will add up, and if you don’t pay it back, the amount you have to pay will be taken out of your death benefit.

Need Cash Now? These Policies Can Help

If you’re looking for life insurance policies you can borrow from immediately, consider the following:

1. Single Premium Whole Life

These policies are paid with one big payment at the start, so you can use the cash value almost right away.

2. High Early Cash Value Policies

Some whole life or universal life policies are made to give you quick access to cash value from the start.

3. Participating Whole Life (with Dividends)

Some life insurance policies from companies like MassMutual or Guardian Life pay you extra money called dividends each year, which helps your cash value grow faster.

Why Borrow Against Life Insurance?

Many people choose to borrow from their life insurance because it offers an easy and cheaper way to get cash when needed. Here are some common reasons:

Avoid High-Interest Credit Cards: 

Instead of using credit cards that charge high interest, borrowing from your life insurance usually comes with lower interest rates, saving you money.

Cover Medical Expenses: 

Unexpected medical bills can be costly. Using your life insurance loan can help pay these without having to take out expensive loans.

Pay for a Child’s Tuition: 

You can use the loan to help cover college or school costs, making education more affordable.

Fund a Business: 

If you want to start or grow a business, borrowing from your policy can provide quick funds without complicated approvals.

Use as a Bridge Loan for Real Estate: 

When buying a home or property, you may need short-term cash until other funds come through. A life insurance loan can fill this gap.

Benefits of Borrowing from Life Insurance

1. No Credit Check

Loans don’t need a credit check because you’re borrowing money from your own life insurance policy.

2. Fast Access to Funds

You can usually get the money within a few days, making it a good option for emergencies.

3. Flexible Repayment

You don’t have to follow a set repayment schedule, but keep in mind that interest will keep adding up over time.

4. Lower Interest Rates

Life insurance loans usually have lower interest rates around 5% to 8% which is often cheaper than credit cards or personal loans.

5. Tax-Free Loans

Loans are generally not considered taxable income as long as the policy remains active.

Risks of Borrowing Against Life Insurance

If you don’t pay back the loan you have taken, your death benefit will be lowered by the amount you borrowed, plus the interest will be added over time. If the loan gets too big and you don’t repay it, your policy might stop working because the cash value can’t cover the costs anymore. This means you could lose your coverage and might have to pay taxes. Also, if your policy ends or you cancel it while you still have to pay money, the amount you borrowed over what you paid in could be taxed as income.

How Much Can I Borrow from My Life Insurance?

This depends on your policy’s cash value and the insurance company’s rules.

In General

You can borrow up to 90% of your available cash value.

If your policy has $50,000 in cash value, you might be able to borrow up to $45,000.However, it’s a good idea to keep some extra cash in your policy to avoid losing it if the interest keeps adding up.

Smart Alternatives to Life Insurance Borrowing

Before you proceed, consider whether a personal loan, home equity line of credit (HELOC), or 401(k) loan might serve your needs better, especially if:

• Your policy’s cash value is still small
  
• You need more flexible funding
  
• You want to preserve your death benefit
  

FAQs About Borrowing from Life Insurance

1. Can You Borrow Money from Life Insurance?

Yes, if you have a permanent life insurance policy with sufficient cash value. Term policies do not qualify.

2. How to Withdraw Money from a Life Insurance Policy?

You can:

• Take a loan
  
• Make a partial withdrawal
  
• Fully surrender the policy
  

Each method has different tax and coverage implications.

3. What’s the Average Rate for Borrowing Against a Life Insurance Policy?

The interest rate typically ranges from 5% to 8%, depending on the insurer and policy type. Some allow you to pay interest out of the remaining cash value.

4. How Much Can I Borrow from My Life Insurance Policy?

Most policies allow borrowing up to 90% of your cash value, though some limit it to 75% or less to prevent policy lapse due to accrued interest.

5. Is Life Insurance Borrowing Taxable?

Generally, no. Life insurance loans are tax-free as long as the policy remains active. If the policy lapses or is surrendered, the loan may become taxable.

Pro Tips for Smart Life Insurance Borrowing

Use borrowing only when you really need it, because it’s still a loan that you have to pay.

Try to repay it if you can, paying it back means that you are keeping your full death benefit and protects your policy’s value.

Talk to your insurance company to understand the interest, fees, and how to repay the loan.

Keep an eye on your policy to make sure it doesn’t stop working because of too much debt.

Final Words

If you want to take money from your insurance company in your life when you are in trouble or any emergency, borrowing from your life insurance can be an easy way to get money quickly and it’s an advantage that you can get it without credit checks or high-interest loans. Permanent life insurance policies, like whole life or universal life, build cash value that you can borrow at any time. This money can help cover things like medical bills, education, or emergencies. But it’s important to borrow carefully because unpaid loans and interest will reduce your death benefit and could put your policy at risk. You have to make sure that you always read your policy details and talk to your insurer or a financial advisor before borrowing. Using your life insurance loan carefully can give you financial help when you need it, while protecting your family’s future.

Ready to learn more or explore your borrowing options? Contact our insurance provider today to find out how borrowing from your life insurance can work for you. Take control of your financial future with smart choices!