Can You Borrow a Loan Against Your Life Insurance Policy? Explained

Introduction

When you have a cash-value life insurance policy, you can borrow a loan against the policy. It is a quick and easy way to get cash without the long and tedious loan approval process. Essentially, you are not borrowing money from a lender.

A loan against your insurance policy means borrowing money from yourself. However, term insurance policies don’t provide this benefit because term insurance has a limited period. You can get a loan against whole life insurance.

Understanding Loan Against Life Insurance

You can borrow against the accumulated funds in your permanent life insurance policy only after a few years of continuously making premiums. The initial insurance premiums contribute to indemnity benefits. You can build the cash value of your insurance policy as the policy matures.

The cash value you can borrow against and the period after which you can borrow against your insurance policy depends on the provider. The insurer may disburse a life insurance loan within 1–15 business days.

When you borrow against your life insurance, the policy loan will be credited to your bank account. As long as you repay the loan, this cash loan is tax-free. The cash value of your insurance is the collateral. Similar to regular loans, loans against life insurance also incur interest rates. In many cases, insurers charge higher interest rates compared to other lenders.

You choose loan repayment according to the agreement with your insurer. If you decide not to repay the loan, the insurance company will cut down the death benefit your beneficiaries will receive. It can put the life insurance meaning at risk.

Pros	Cons
No credit checkCompetitive interest ratesImmediate cash availabilityFlexible repayment timetableOption to not repay the loan (at the risk of reducing the policy’s death benefit)Continue to earn interest and dividends on the policy	May not be eligible if the insurance doesn’t have significant cash valueReduced payout riskRisk losing coverageMust pay tax if policy lapses before fully repaying the loan

Loan Against Life Insurance: Is It Right for You?

While getting quick cash, you can choose not to repay goods; it is not always the case. You have to weigh the risks against the benefits. You may have to pay higher interest rates. The beneficiaries may lose considerable benefits if the loan remains unpaid until the insured’s lifetime. So, when is it right to borrow against life insurance?

You have immediate cash needs.
You don’t qualify for standard loans due to your financial situation
You can’t afford the policy premiums
Your other loan options incur much higher interest rates

How to Apply for a Life Insurance Loan?

Your life insurance provider will determine the loan application process, terms, and conditions. Many insurers now allow you to apply online. Before applying for a life insurance loan, do the following:

Verify and confirm your policy type and eligibility
Do a risk vs benefits analysis based on the existing cash value
Thoroughly understand the loan interest rates, terms, conditions, and repayment policies
Discuss with your beneficiaries
Make plans for loan repayment
Keep monitoring the policy and track the accrued interest
Pay premiums and interest rates promptly to avoid policy lapse

Conclusion

Cash value in life insurance is helpful for living benefits and death benefits. You can borrow against this cash value to leverage the living benefits. You don’t withdraw money from the policy, so you must continue making the premium payments.

Policy loans are great financial tools only when you are deep into economic turmoil and can’t afford any other type of loan. You must always discuss with your insurance provider to understand the pros and cons to determine if the policy loan is right for you.