Can You Borrow Money Off Your Life Insurance?
Yes, most permanent life insurance policies—such as whole or universal life—carry a cash value that can be borrowed against. The policyholder can request a loan, and the insurer lends the amount at a set interest rate. The loan does not count as income, so it is not taxable, but it reduces the death benefit and any cash value until repaid.
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How the Loan Process Works
When a loan is requested, the insurer deducts the requested amount from the policy's cash value and issues the funds, typically via check or direct deposit. The loan accrues interest, usually at a rate tied to the insurer's policy or a fixed percentage. If the policyholder does not repay, the loan balance plus interest is subtracted from the death benefit when the insured passes away.
Eligibility and Limits
Eligibility depends on the policy type and its current cash value. Whole life policies often have a higher borrowing capacity, while universal life allows flexible borrowing based on available equity. Most insurers cap the loan at 80% of the cash value to protect the policy's solvency. If the cash value falls below the loan balance, the policy may lapse or the insurer may require additional premiums.
Repayment Considerations
Repayment terms are flexible; the policyholder can repay at any time without penalty, or choose to pay only interest and let the principal roll over. However, unpaid interest can compound, increasing the debt. If the loan is not repaid before death, the outstanding balance reduces the payout to beneficiaries.
Risks and Alternatives
Borrowing against life insurance can be a convenient source of cash, but it carries risks. Interest costs, potential policy lapse, and reduced death benefit can undermine the policy's original purpose. Alternatives include personal loans, credit lines, or selling the policy through a life settlement if the policy is no longer needed. A financial advisor can help weigh these options against long‑term goals.