Borrowing Money from a Life Insurance Policy: How It Works

Can You Borrow Money from Your Life Insurance Policy?

Yes, if you have a permanent life insurance policy with a cash value component, you can take a loan against that cash value. The loan is a credit line that uses the policy's accumulated savings as collateral.

When the Loan Is Available

Loans can be taken only after the policy has built up sufficient cash value, usually a few years after issuance. The amount you can borrow is limited to the policy's cash value minus any accumulated loan balance and fees.

How Loans Are Repaid

Policyholders may repay the loan at any time, but interest accrues continuously. If the loan balance plus interest exceeds the cash value, the policy may lapse or the death benefit will be reduced by the outstanding loan amount.

Interest Rates and Fees

Interest rates are typically set by the insurer and are often fixed, ranging from 4% to 8% per year. Some policies charge a one‑time loan fee or a minimum interest charge.

Impact on Your Policy

Borrowing does not reduce the policy's death benefit until the loan is repaid. However, unpaid interest can accumulate, increasing the amount that will be deducted from the death benefit upon death.

Why Borrow from a Policy?

Common reasons include covering short‑term cash needs, paying medical expenses, or avoiding high‑interest credit cards. Because the loan is secured by the policy, lenders typically do not require credit checks.

Alternatives to Policy Loans

Other options include taking a policy withdrawal, which reduces both cash value and death benefit permanently, or using a policy conversion to a different type of insurance. Evaluate the long‑term cost before choosing a loan.

Key Takeaways

Borrowing against a life insurance policy is a flexible way to access funds, but it carries the risk of diminishing future benefits if not managed carefully. Always review your policy statement and discuss repayment strategies with your insurer before proceeding.