How to Borrow Against Life Insurance (2024)

FAQs

Can you really borrow against life insurance? ›

You can typically take out loans against permanent life insurance policies, but not term life insurance policies. Life insurance loans use cash value accounts as collateral. Term life insurance policies do not come with a cash value account, so policyholders can't borrow money from their insurer against these policies.

The $10,000 refers to the face value of the policy, otherwise known as the death benefit, and does not represent the cash value of life insurance policy. A $10,000 term life insurance policy has no cash value.

No, you cannot immediately borrow against life insurance. You must wait until your policy's cash value exceeds a certain threshold, and it can take several years to reach that point. The minimum cash value required for a policy loan varies by insurer.

Term life insurance, does not have a cash value, so you cannot borrow from these policies. The funds you borrow are tax-free, but there are typically interest payments. Paying back the loan is often optional, however, if you do not repay, the death benefit will be lower.

The policy's cash value acts as collateral for the policy loan. If you never pay back the policy loan during your lifetime, the amount is deducted from the death benefit when you pass away—meaning that your beneficiaries will receive less and essentially repay the loan.

Examples of Cash Value Life Insurance

An example is a cash value life insurance policy with a $25,000 death benefit. Assuming you don't take out a loan or withdraw, the cash value accumulates to $5,000. After the policyholder's death, the insurance company would pay out the full death benefit, which would be $25,000.

Permanent life insurance, such as universal and whole life policies, comes with a death benefit and a cash value account that you may can cash out while you're still living.

How do I know if my life insurance has cash value? ›

You will typically find it listed separately in your life insurance statements. The net cash value will generally be lower than your total accumulated cash value for the first several years of coverage, as it's reduced by fees and surrender charges.

How long does it take to build cash value on life insurance? The length of time varies by insurer, but in most cases, cash value does not start to accrue until you have paid premiums for two to five years.

You could potentially take a loan from your policy, withdraw the cash value it's accrued over time, use a living benefit rider or sell your policy. A financial advisor can help you integrate a life insurance policy into your financial plan. Find an advisor today.

It's important to note that the loan amount, along with any accrued interest, may need to be repaid to avoid potentially reducing the death benefit or canceling the policy. If the loan is not repaid, it may impact the long-term financial protection provided by the life insurance policy.

More expensive than term life: Cost is one of the top reasons why some financial advisors believe cash value life insurance is “bad.” For example, a $500,000 whole life insurance policy can cost seven to 22 times more per month than a $500,000 term life insurance policy, depending on your age and gender, based on our ...