How to Borrow Money from Your Life Insurance Policy: An Evergreen Guide

What Is a Life Insurance Policy Loan?

A life insurance policy loan lets you tap the cash value of a permanent life insurance contract—such as whole life or universal life—without surrendering the policy. The insurer treats the loan like a secured line of credit, using the accumulated cash value as collateral.

When Does Borrowing Make Sense?

Borrowing from a policy can be attractive when you need cash quickly, want to avoid credit‑check applications, or are looking for a low‑interest alternative to a traditional loan. It's most appropriate for:

• Emergency expenses when other options are costly or unavailable
• Short‑term financing where you can repay before interest compounds significantly
• Supplementing retirement income while preserving the death benefit

How the Loan Process Works

1. Verify Cash Value Availability

Only permanent policies build cash value. Term policies do not qualify. Check your latest statement or contact your insurer to confirm the amount you can borrow—typically up to 90% of the cash value.

2. Submit a Loan Request

Most insurers allow you to request a loan online, by phone, or through a written form. You'll need your policy number, the desired loan amount, and a preferred repayment method.

3. Receive Funds

Funds are usually transferred via check, direct deposit, or a prepaid card within a few business days. No credit check is required.

Costs and Interest Rates

Life insurance loans carry interest, but rates are often lower than credit‑card or payday loans. Rates can be fixed or variable, depending on the insurer and the policy type. For example, many whole‑life policies charge 5%–8% annually, while universal life policies may tie rates to a market index plus a margin.

Interest accrues daily and is added to the loan balance. If unpaid, interest compounds, reducing the policy's cash value and potentially the death benefit.

Impact on Your Policy

Borrowing does not require monthly payments, but unpaid interest and principal reduce the cash value. If the loan balance plus accrued interest ever exceeds the cash value, the policy may lapse, causing loss of coverage.

Upon your death, the insurer pays the death benefit minus the outstanding loan balance and interest. This can diminish the amount your beneficiaries receive.

Repayment Options and Strategies

While repayment is not mandatory, paying back the loan (plus interest) helps preserve the policy's value. Common strategies include:

• Making regular payments from a checking account or payroll deduction
• Using dividends (if your policy pays them) to offset interest
• Refinancing the loan with a lower‑interest personal loan if rates drop

Tax Implications

Policy loans are generally tax‑free as long as the policy remains in force. However, if the policy lapses or is surrendered with an outstanding loan, the amount may be considered a taxable distribution.

Risks and Drawbacks

Borrowing against your life insurance carries several risks:

• Reduced death benefit: Beneficiaries receive less.
• Policy lapse: Excessive borrowing can cause the policy to terminate.
• Interest accumulation: Unpaid interest erodes cash value quickly.
• Opportunity cost: Cash value could otherwise earn dividends or be used for other investments.

Alternatives to Policy Loans

Before tapping your life insurance, compare other financing options:

Weigh interest costs, repayment flexibility, and the effect on your long‑term financial goals.

Key Takeaways

Borrowing against a permanent life insurance policy can provide fast, low‑interest cash, but it reduces the cash value and death benefit and carries the risk of policy lapse. Evaluate your need, understand the costs, and have a repayment plan before proceeding.