How to Borrow Money from Your Life Insurance Policy

Borrowing from a life insurance policy involves requesting a loan against the cash value that has accumulated in a permanent policy, such as whole life or universal life. The insurer advances the amount you request, you repay with interest, and the outstanding balance reduces the death benefit until it's paid off.

Eligibility and Policy Types

Only permanent policies build cash value; term policies do not qualify. You must have sufficient cash value to cover the loan amount plus any required minimum reserve. Most insurers allow loans up to 90% of the available cash value, though some limit it to 80% to protect the policy's health.

How to Initiate the Loan

Contact your insurer or agent and complete a loan request form, providing the desired amount and preferred repayment method. The insurer will verify the cash‑value balance, calculate the interest rate—usually a fixed rate set by the company—and issue the funds, often via a check or direct deposit within a few business days.

Repayment Mechanics

Repayment is flexible; you can make payments at any time, but interest accrues daily on the outstanding balance. If you fail to repay, the loan plus accrued interest is deducted from the death benefit, potentially leaving beneficiaries with less than intended. Some policies allow you to repay by reducing the cash value through additional premium payments.

Impact on Policy Performance

Taking a loan reduces the cash value that would otherwise continue to earn dividends or interest, slowing the policy's growth. If the loan balance exceeds the cash value, the policy may lapse, causing loss of coverage and possible tax consequences.

Key Considerations

• Compare the insurer's loan interest rate with external borrowing options.
• Ensure the loan amount won't jeopardize the policy's long‑term viability.
• Understand tax implications: loans are generally tax‑free, but a lapse can trigger taxable income.

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