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Can you borrow against your life insurance policy?

Aug 23, 2021 5 Minute Read

Can You Borrow Against Life Insurance?

Most people think of life insurance as a financial cushion that kicks in after their lifetime. But did you know that some policies can also provide a source of cash while you’re still living?

Permanent life insurance policies come with a cash value component, which is like a savings account built into your policy. You can borrow against this cash value in your policy, giving you and your family another way to cover expenses or meet long-term goals.

Taking a policy loan from your life insurance can get complex, so it’s important to know the rules, so you avoid putting your coverage – and your family’s financial security – at risk. Here’s how borrowing money from life insurance works to help decide if it makes sense for you.

Does life insurance have cash value?

Permanent life insurance policies, including final expense, whole life, and universal life, have cash value. That cash value component is one of the primary differences between the two main types of life insurance, term and permanent life insurance.

Can you borrow against term life insurance?

Term life insurance is meant purely to protect your beneficiaries for a set period of time, typically from 10  to 30 years. Term life provides a cash payout if you die while the policy is active and doesn’t come with cash value. That’s why it’s so affordable: It offers just-in-case protection right when you need it.

Can you borrow against permanent life insurance?

Permanent life insurance, on the other hand, lasts a lifetime (as long as you pay your premiums) and also builds cash value. You’ll pay more for those extra protections, but they can be worth it if you want a life insurance plan with a guaranteed payout that won’t expire.

Cash value is like an account that builds interest over time in your permanent life insurance policy. It’s separate from the death benefit amount, which is the payout your beneficiaries receive when you die. For example, you might have a policy with a $300,000 death benefit and a cash value of up to $100,000.

The cash value available in your policy typically increases as you pay your premiums, so it may take a few years to grow large enough to borrow. Your insurer will set the exact cash value amount in your policy and let you know when you’re able to use it.

How borrowing money from a life insurance policy works

Wondering, “How much can I borrow from my life insurance policy?” The amount you can borrow against life insurance depends on the size of your policy and how much you’ve paid into it so far.

When you request a loan from your cash value, you’re not really taking out the money you’ve paid into the account. Instead, your insurer is extending a loan to you and using the cash value as collateral. The more you’ve paid in your policy, the lower your payments to pay back the loan will typically be.

Once you take out a policy loan, you can spend the money however you want, from paying bills to investing in home renovations. Unlike a traditional bank loan, you also don’t need to pay back the money on a particular schedule.

Keep in mind, though, that your insurer will charge you interest on the loan. The longer it takes to repay the funds, the more your interest will grow. In some cases, your insurer will use the cash value you’ve built up in the policy to cover those interest payments. Once those funds are used up, it could cause the policy to lapse – which means that your death benefit won’t be there later for your family.

If your family is counting on that death benefit, talk to your insurer about your debt payments and how much you’ll need to pay monthly to keep the policy active. Most companies will provide an “in-force illustration” to help you understand your debt obligations over time.

When to consider borrowing from life insurance

Not sure whether to borrow from your policy or another source? Typically, borrowing from a life insurance policy may make sense in the following situations:

  • You no longer need the death benefit from the policy. If you’re retired, have paid off all of your major expenses, and have some money set aside for any final needs or uncertainties, there’s less risk involved in borrowing from your life insurance now. One alternative to borrowing is surrendering your permanent life insurance policy, which means canceling it outright and receiving any accumulated value, known as cash surrender value. You should make sure you really don’t need the death benefit before you do this, though.
  • You don’t qualify for other types of loans. Unlike a bank loan, you don’t need to go through a credit check when applying for a policy loan and it won’t affect your credit score. If you have trouble qualifying for a bank loan, this might be your best option to borrow. It also means that you don’t have to put up other sources of collateral, like your home. You risk losing your life insurance coverage, but it might be preferable to putting your home at risk.
  • You can afford to pay back the loan. Check with your insurer first to make sure debt and interest payments won’t strain you financially. If you don’t keep up with payments and your policy lapses, it could have big tax implications. While the death benefit your beneficiaries receive is tax-free, if you use up your permanent life insurance coverage to pay off a policy loan and your coverage lapses, the value of your depleted life insurance will be considered taxable income by the IRS.

Want more information about how to borrow against a life insurance death benefit?

We’re here to help. Give our team at eFinancial a call to explore your life insurance options and learn how to get the most out of your coverage.


At eFinancial, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed and updated regularly to ensure the information is as relevant as possible.