Borrowing Against Life Insurance: Which Policies Offer Loans

Whole Life Insurance: The Classic Cash‑Value Option

Whole life insurance builds a guaranteed cash value that grows tax‑deferred over time. Because the policy's value is insured by the company, you can borrow against it at a fixed interest rate, typically 4–6%.

Loans are taken directly from the insurer, and you can repay them with or without the policy's death benefit. If the loan is not repaid, the amount plus interest reduces the death benefit.

Universal Life: Flexible Loans with Variable Rates

Universal life offers a flexible premium schedule and a cash value that can grow at a variable rate tied to market performance or a fixed rate set by the insurer.

Loans from universal policies usually carry a variable interest rate that follows the policy's cash‑value growth rate, often around 3–5%. Because the policy is more flexible, you can adjust loan amounts and repayment schedules, but large outstanding loans may reduce the death benefit more quickly.

Variable Life: Investment‑Linked Loans

Variable life insurance links the cash value to a selection of investment sub‑accounts, such as mutual funds. Loans can be taken against the current market value of these accounts.

Interest rates on variable life loans are generally fixed, but the cash value can fluctuate with market performance. If the value falls below the loan amount, the insurer may require additional collateral or policy adjustments.

Indexed Universal Life: Combining Index Gains and Loans

Indexed universal life policies tie cash‑value growth to a market index while providing a guaranteed minimum interest rate. Loans can be taken against the accumulated value, but the policy's crediting method may affect how much you can borrow.

Typical loan rates hover around 4%. Because the policy's cash value can be capped, borrowing too much may limit future growth.

Key Considerations When Borrowing

• Interest Accumulation: Unpaid loans accrue interest that compounds, reducing the death benefit.
• Tax Implications: Loans are generally tax‑free if the policy remains in force, but surrendering the policy or defaulting can trigger taxable events.
• Policy Performance: Loans against variable or indexed policies expose you to market risk, potentially eroding the borrowing capacity.