When to Borrow Against a Life Insurance Policy

All life insurance policies have a death benefit: a payout that goes to your beneficiaries if you die while the coverage is in effect. Some types of life insurance also have a cash value, and you might be able to borrow against these funds as a living policyholder.

Life insurance policy loans have major advantages over bank loans or credit cards, but they're still loans — and if you don’t pay them back, there are consequences.

» MORE: Cash value life insurance

What types of life insurance can you borrow against?

Whether you can borrow against your life insurance policy depends on the type of policy you have.

You can borrow against permanent life insurance that has a cash value component. This works like a savings account, and earns interest over time at either a fixed or variable rate. Examples of permanent life insurance include whole life insurance, universal life insurance and indexed universal life insurance.

You might be able to borrow up to 90% of the cash value you’ve built up with a permanent life insurance policy. Because term life insurance doesn’t have a cash value, you can’t borrow against it.

» MORE: Types of life insurance

Pros and cons of borrowing against life insurance

Whether you need money to pay a medical bill or your kid’s college tuition, a loan against life insurance cash value has some advantages over credit cards or personal loans. But there are also a few drawbacks to consider.

Pros

No credit check. There’s no credit check or other approval process to borrow from your life insurance policy, as long as you have enough cash value.

Low interest rates. Interest rates for life insurance loans are usually lower than other kinds of borrowing, such as personal loans or credit cards.

Set your own schedule. You can choose when and how to repay the loan — or whether to take a reduction to your death benefit and not repay it at all.

Cash value growth. The cash value of your policy can continue to grow even if you’ve borrowed against it.

Cons

Waiting time. It can take years to build up enough cash value to borrow against.

Interest adds up. Even if rates are relatively low, the interest on your loan could still become costly over time.

Unpaid balances are risky. Having a large outstanding balance could significantly reduce your death benefit or even cause your policy to lapse.

Tax implications. You could end up owing taxes if you don’t repay a loan or your policy lapses.

» MORE: Is life insurance taxable?

Is it a good idea to borrow against your life insurance?

A loan against life insurance could be a good alternative to running up a credit card balance or paying exorbitant interest on a personal loan.

Approach any loan from your life insurance company carefully:

Keep an eye on the interest accruing on your loan.
Set your own schedule for repaying the loan.
Stick to the plan to repay the loan. If you don’t intend to repay the loan, consider taking out a cash withdrawal to avoid dealing with interest.
Before taking out a policy loan, request an in-force illustration from your life insurance company. This document will outline the way the loan will impact your policy’s future performance. If you do take out the policy loan, request an in-force illustration every one to two years to monitor performance.

How long do you have to pay life insurance before you can borrow against it?

There isn’t a set amount of time that has to pass before you can borrow against your life insurance policy. Instead, it’s based on cash value.

Life insurance companies will typically let you borrow up to about 90% of your policy’s cash value, so you’ll need to wait long enough for the cash value to grow to more than the amount you want to borrow.

Depending on your policy type and terms, as well as how much coverage you bought, it could take 2-10 years or more before you have enough cash value to borrow against.

» MORE: How much life insurance do I need?

What else can I do with life insurance cash value?

Beyond borrowing against your life insurance, you might also be able to use accumulated cash value to:

Buy more coverage to boost the life insurance death benefit.
Pay premiums if you have a whole life insurance policy, or cover the cost of your coverage and expenses if you hold a universal life insurance or indexed universal life insurance policy.
Withdraw money from your policy's cash value, which reduces the death benefit accordingly unless you choose to pay it back.

🤓Nerdy Tip

With permanent policies, the cash value is “use it or lose it” — which is why it’s worth strategizing how to benefit from these funds while you’re alive. It’s a common misconception that beneficiaries will receive an additional cash value payout along with the death benefit when you die, but that’s not the case.