Life insurance is a way to provide financial security to your family or other beneficiaries after you pass away. But did you know that certain types of life insurance can also be used as a financial tool while you’re still alive?
The option to borrow against life insurance isn’t available for every type of policy, so it’s important to understand how it works and whether it’s right for you. Some life insurance policies build up cash value, almost like a savings account within your policy. You can borrow against it if you need money for an emergency, a major purchase, or an unexpected expense.
Other policies provide coverage for a set number of years and don’t accumulate cash value — so borrowing isn’t an option. That’s why knowing your policy type is necessary before counting on cash that may not be available.
In this article we’ll walk you through:
The types of life insurance that allow borrowing – Not all policies are created equal, and we’ll break down which ones give you access to cash.
How and when you can borrow – Understanding the timeline and process can help you decide if this is the right move for you.
A step-by-step guide to borrowing against your policy – From checking your eligibility to getting the funds in hand, we’ll cover what you need to know.
The advantages and disadvantages that come with borrowing against life insurance.
Which life insurance policies can you borrow against?
To understand why borrowing against a life insurance policy isn’t an option for all types of coverage, let’s first look at the different types of life insurance we offer and how they work.
- Term life: This is a temporary policy that is purely for protection and provides a death benefit if the policyholder passes away during a specified time period. It does not build any cash value.
- Whole life: This is a type of permanent life insurance that provides coverage for your entire lifetime. It includes a cash value component that grows over time.
Can you borrow against term life insurance?
The direct answer is no; you cannot borrow against a term life insurance policy. Let us explain:
What is term life insurance? Term life insurance provides coverage for a set “term” — typically 10, 20, or 30 years. If the policyholder passes away during that time, their beneficiaries receive a payout, known as a death benefit. However, if the term expires and the policyholder is still alive, the coverage ends unless they renew or convert the policy to a permanent one.
Many people choose term life insurance because it’s a straightforward and affordable way to provide financial protection for their loved ones.
Why can’t you borrow against term life insurance? Since term life insurance is designed purely for protection, it doesn’t have a savings component and doesn’t accumulate cash value over time. That means there’s nothing to borrow against. While term policies are great for securing coverage at a lower cost, they don’t offer much financial flexibility.
If you need to borrow money, what are the alternatives? If you have a term policy and find yourself needing cash, you might want to look into other ways to access funds.
- Personal loans: A bank or credit union may offer a personal loan with reasonable interest rates, especially if you have a strong credit history.
- Home equity loans: If you own a home, you may be able to borrow against its value to get access to the money you need.
- Retirement account loans: Some 401(k) plans allow you to take out a loan against your savings, though this should be done cautiously to avoid impacting your long-term financial security.
Can you borrow against whole life insurance?
Yes, you can borrow against a whole-life insurance policy. Here’s what you need to know.
What is whole life insurance? Whole life insurance is a type of ‘permanent’ life insurance, meaning it provides coverage for your entire life as long as you keep paying your premiums. One of the standout features of whole life insurance is its cash value component, where a portion of your premium payments goes into a savings-like account that grows over time.
How does the cash value accumulate? The cash value in your whole life policy grows without being affected by market ups and downs, making it a more stable way to build guaranteed savings. The insurer sets a fixed interest rate, and as you keep your policy active, the cash value from the premiums you pay every month continues to accumulate year after year.
Using your whole life insurance as a loan alternative. Since the cash value of a whole life insurance policy builds up over time and it’s essentially your money, you can borrow against it like a loan, often without a complicated approval process or credit check. The loan interest rates are typically lower than what you might find with personal loans or credit cards.
However, if you don’t repay the loan, the amount you owe, plus any interest, will be deducted from the death benefit your beneficiaries would receive. So, while borrowing against your policy can be a helpful option, you need to make sure you keep track of your loan and repayment.
How much can you borrow against a life insurance policy?
The maximum amount you can borrow is determined by your insurer, but most policies allow you to take out up to 90 percent of your cash value. Some insurers may have lower limits, so it’s always a good idea to check with your provider.
Key factors that affect your loan amount:
- Policy age and cash value: The longer you’ve had your policy, the more cash value it has likely accumulated, which means you may be able to borrow more.
- Insurer restrictions: Some insurance companies cap the amount you can borrow, even if your cash value is high.
- Outstanding loans: If you’ve already borrowed against your policy, your available loan amount will be reduced by what you still owe.
What happens if you don’t repay the loan? While you aren’t required to make monthly payments like a traditional loan, any outstanding balance — including interest — will be deducted from the death benefit paid to your beneficiaries. If the loan balance and compounded interest grow too much, causing the cash value to fall below what’s needed to maintain the policy, it could put your policy at risk of lapsing. That’s why it’s recommended to monitor the loan balance and repay as soon as possible.
How soon can I borrow from my life insurance policy?
If you’re considering borrowing against your life insurance policy, you might be wondering how soon you can access some of that cash value.
Unlike a traditional loan, where you apply based on your credit and income, borrowing from a life insurance policy depends entirely on how much cash is available — and that takes time. Exactly how long depends on several factors, including your policy type, insurer rules, and the duration of premium payments.
What affects when you can borrow?
- Policy type and insurer rules: Some whole-life policies accumulate cash value faster than others, and each insurer has its own guidelines for when borrowing is allowed.
- How long the policy has been open: Most policies don’t accumulate enough cash value right away, so you’ll typically need to wait a few years before you can take out a loan against it.
- Minimum cash value requirements: Insurers often set a threshold you must reach before borrowing is an option, meaning you’ll need to have a certain amount saved in your policy first.
How long does it typically take for cash value to build up? For most whole-life policies, it usually takes between two to five years before there’s enough cash value to borrow against. Some policies are structured for faster cash value growth, but in general, the longer your policy has been active, the more you’ll have available to borrow.
The pros and cons of borrowing against life insurance
Borrowing against your life insurance policy can be a convenient way to access cash when you need it, but it’s important to understand both the benefits and potential drawbacks before making a decision.
Advantages of borrowing against life insurance
- No credit check required: Since your policy’s cash value serves as collateral, there’s no need for a credit check or lengthy approval process. This makes it a great option if you want to avoid impacting your credit score.
- Flexible repayment terms: Unlike traditional loans, borrowing against an insurance policy doesn’t come with strict monthly payments. You can repay at your own pace — or not at all — though unpaid balances will reduce your policy’s benefits.
- Continued policy coverage: Your policy remains active even if you take out a loan, so you’ll still have life insurance protection as long as you keep up with premium payments.
Disadvantages of borrowing against life insurance
- Reduced death benefit: If the loan isn’t repaid, the amount you owe — plus interest — will be deducted from the death benefit, leaving your beneficiaries with less financial protection.
- Risk of policy lapse: If the interest on your loan accumulates to the point where it exceeds your policy’s cash value, your coverage could expire, leaving you without insurance.
- Not an option for term life insurance: Policy loans are only available on permanent life insurance policies (like whole life). If you have term life insurance, borrowing isn’t an option.
How to borrow from life insurance
If you’re ready to borrow against your life insurance policy, the process is typically straightforward. As already covered, there’s no credit check or long approval process since you’re using your policy’s cash value as collateral. But before borrowing from your life insurance policy, it’s best to understand how it works.
Here’s a step-by-step guide:
Step 1. Check your policy type
Not all life insurance policies allow borrowing. Whole life — as well as other permanent policies — accumulate cash value, which you can borrow against. Term life insurance, however, does not build cash value, so loans aren’t an option.
Step 2. Contact your insurer
Reach out to your insurance provider to confirm how much cash value is available to borrow. Most insurers allow you to take out up to 90 percent of your cash value, but the exact amount varies by policy.
Step 3. Review loan terms
Before taking a loan, make sure you understand:
- Interest rates – These are usually lower than personal loans or credit cards but still accumulate over time.
- Repayment options – Unlike traditional loans, you’re not required to make payments, but unpaid interest can reduce your death benefit.
Step 4. Submit a loan request
Once you’ve reviewed the terms, your insurer will guide you through the loan request process. Funds are typically available quickly — often within a few days — since there’s no need for underwriting or approval like a bank loan.
Step 5. Track your repayment
While repayment is flexible, any outstanding loan balance (plus interest) will be deducted from the death benefit your beneficiaries receive. Keeping an eye on your balance helps protect both your coverage and your long-term financial goals.
What to consider before borrowing against a life insurance policy
Taking a loan against your life insurance policy can be a smart way to access cash without going through a credit check or traditional lender. But before borrowing, consider the long-term impact on your policy and financial future.
Here are a few questions to ask yourself:
Do I have other financial options? Borrowing against your life insurance is convenient, but it’s not always the best idea. Would a personal loan, home equity line of credit, or dipping into savings be a better choice? Since unpaid policy loans reduce the death benefit your loved ones receive, it’s worth comparing alternatives before making a decision.
How will borrowing impact my policy’s value and death benefit? The loan amount and interest are subtracted from your policy’s cash value. If you don’t pay it back — and mind you, you are not required to — the death benefit your beneficiaries receive will be less than you planned. And if the interest on the unpaid loan grows too large, it could even cause your insurer to cancel your policy.
Is this the right financial decision for the long term? Borrowing from your life insurance can provide quick access to funds but think about the bigger picture. Will taking this loan help or hurt your long-term financial security? If you’re borrowing for a short-term need, make sure you have a plan to repay the loan before interest accumulates.
Will borrowing against my life insurance affect my credit score? While borrowing this way doesn’t involve a credit check, if you don’t repay the loan and your policy lapses, the insurer might report any outstanding debt to credit agencies. This could affect your credit score, as it would be seen as an unpaid debt.
Life is short: Make sure it’s insured.
Borrowing against life insurance can be an easy way to access cash, but it’s important to consider how it will impact your death benefit and long-term financial plans. Only permanent life insurance policies — like whole life — offer this option, so make sure you have the right type. And if you think you might need to borrow soon, choose a policy designed for strong cash value growth.
Not sure about the next steps? The Baldwin Group is here to help. We’ll walk you through your options and find a policy that fits your needs.
Through our partnership with Ethos, you can get immediate coverage with no medical exams or blood tests — just a fast, straightforward application process.
Find the right policy today. Visit us online to get started with one of the life insurance experts at Ethos.
