How to Borrow Money from Your Life Insurance Policy [2022]
Quick Facts
You can only borrow against permanent or whole life insurance policies since term life insurance doesn’t accrue cash value
Borrowing from your life insurance can be a quick and simple way to get cash when needed, but it comes with significant risks
Life insurance loans are borrowed against the policy’s death benefit, and the insurance company typically uses the policy as collateral
When money is tight, borrowing against a life insurance policy is an easy way to access the cash you need quickly. However, you can only borrow against permanent life insurance policies.
In this article, we’ll explore the options for cashing out life insurance in 2022, including what the process is, how much you can borrow, and the risks you should be aware of before borrowing money from your life insurance.
Can you borrow from life insurance?
People often wonder if it’s possible to borrow money from their life insurance. The answer is that it depends on your policy type, your policy’s cash value, and the rules imposed by your life insurance company regarding loans.
Types of Life Insurance Policies You Can Borrow Against
Generally, you can borrow from life insurance if you own a policy that has built enough cash value over time.
Permanent or whole life insurance policies are more expensive types of life insurance coverage that don’t have an expiration date. Because permanent and whole life insurance policies are the only types that build cash value, they’re the only types you can borrow against — so long as they have accrued enough value over time.
Although permanent and whole life insurance accrues cash value, newer policies usually have a lower cash value than more mature policies. Therefore, even if you have a permanent policy, you might not be able to borrow from it if the cash value is insufficient.
Although term life insurance policies are a more popular and less expensive type of coverage, term policies don’t build cash value over time. Therefore, you can’t cash out or borrow against it.
It’s important to remember that insurers have varying loan rules, including limits, fees, and other specifics. For example, loans against life insurance policies build interest regardless of whether the loan is repaid each month. Check your policy documents or contact your insurer to learn about the limitations and fees associated with your policy.
When can you borrow against life insurance?
You can borrow money from your life insurance when the policy has built enough cash value to borrow against. Because the cash value of a newer policy might not be sufficient to borrow against, contact your insurer to learn about your policy’s cash value before attempting to borrow against it.
How much can you borrow against your life insurance policy?
The amount you can borrow against your life insurance policy depends on your policy’s cash value.
Newer policies usually have a lower cash value than older policies with a long history of premium payments. Because newer whole life insurance might not have accrued cash value yet, check with your insurer to determine if or when your policy’s value is sufficient to borrow against.
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How to Borrow Against Life Insurance
If you have permanent life insurance and need cash, you’re probably wondering how to borrow money from your life insurance. You have a few different options for borrowing against your life insurance policy depending on the cash value and the rules set by your life insurance company.
Withdrawal
Some life insurance companies allow policyholders to withdraw money from their permanent or whole life insurance up to the policy’s cash value. Although withdrawals are usually tax-free up to the amount you’ve paid in premiums, you will have to pay income taxes on any amount you withdraw that exceeds the policy’s cash value.
It’s important to remember that withdrawing less than the cash value of your policy will keep your life insurance coverage intact. However, withdrawing the full cash value of the policy will cancel your policy — and therefore cancel your life insurance coverage.
To find out if your life insurance policy is eligible for a withdrawal, check your policy documents or contact your insurance company directly to learn about its rules and withdrawal requirements.
Life Insurance Loan
Policyholders thinking of cashing in their life insurance might wonder, “What is a life insurance loan?” Loans from life insurance policies refer to borrowing money against the cash value of a permanent or whole life insurance policy. Learn more about whole life insurance companies.
Taking out a life insurance loan against your policy is usually straightforward. While the steps may vary between insurance companies, you will generally contact your insurance company and ask for the form or forms necessary to take out a loan.
You may also need to provide your insurer with a signed document certifying your identity and request for a loan, which might need to be notarized. This is more common if your situation meets the following criteria:
Ownership of the policy was recently changed or transferred.
The account information was changed or updated within the last month.
The loan amount exceeds a monetary limit established by your insurer’s loan rules.
Once your loan is approved, you can have the money deposited into your bank account within several days. Depending on your insurer, you can also request that a check be mailed to you.
Surrendering Your Life Insurance Policy
Another option for borrowing money from life insurance is surrendering your policy to the insurance company in exchange for the policy’s cash value.
Surrendering a life insurance policy is similar to obtaining a life insurance loan. After contacting your insurer, you’ll receive forms to fill out, sign, and send back. You may also be asked to submit your request to surrender your policy in writing.
Once the process is complete, your insurer will release your policy’s cash value to you and cancel your life insurance coverage.
It’s important to remember that you could be responsible for paying taxes and fees on the cash received from your surrendered policy. Because of the risks associated with surrendering a life insurance policy — in particular, the loss of your life insurance coverage — surrendering a policy should be reserved as a last resort.
The Difference Between Death Benefit and Cash Value
It’s important to remember that a life insurance policy’s cash value differs from its death benefit.
A life insurance policy’s death benefit is the amount the life insurance company will pay out to your beneficiaries after your death, usually in lump sum or installment payments.
The cash value of a life insurance policy is calculated by determining the policy’s tax-deferred growth and a portion of the premiums you paid into the policy during its lifetime.
The cash value of a life insurance policy is usually less than its death benefit. For example, a newer life insurance policy with a death benefit of $1 million might only have built up a cash value of several hundred dollars, depending on the number of premium payments made toward the policy during its lifetime.
How to Pay Back Your Life Insurance Loan
Although repaying a life insurance loan isn’t required, it’s usually in your best interest — and the interest of your loved ones — to repay it.
Because the borrowed loan amount reduces your policy’s death benefit, failing to repay a life insurance loan can leave your beneficiaries with less financial protection after your death.
Length of the Loan
In addition to impacting your beneficiaries, not repaying a life insurance loan over a long period can lead to compounded interest. This can cause your balance to exceed the premiums you’ve paid into the policy, resulting in a policy lapse. In that case, the excess balance will be treated as income that you will be taxed on.
Borrowing an amount close to the full cash value of your life insurance policy is considered risky. If you decide to take out a life insurance loan, it’s wise to make interest payments and keep a close eye on your policy’s cash value compared to the amount borrowed.
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Benefits and Risks of Borrowing Against Life Insurance
Although borrowing against life insurance can be a good way to get cash quickly when you’re in a desperate financial situation, it can also be extremely risky. Because of that, it’s important to carefully consider the benefits and risks of borrowing from or cashing in your life insurance before making any financial decisions.
Benefits of Borrowing Against Life Insurance
If you’re struggling financially, borrowing money from your life insurance can have several advantages:
Accessing cash quickly. Borrowing money from your life insurance can be a great way to access cash quickly when experiencing extreme financial hardships or unanticipated expenses.
No requirements or restrictions. Unlike credit cards or traditional loans, there are no credit checks or other requirements for borrowing money from your life insurance policy. Additionally, there are no restrictions on what you can spend your borrowed money on.
Collateral-free. Because life insurance companies typically use the policy itself as collateral, policyholders don’t have to put other assets at risk when borrowing.
No schedule for repayment. There are no required monthly payments when repaying your life insurance loan. However, because compounding interest can cause your policy to lapse and result in additional taxes, it’s advisable to make payments regularly.
Accruing cash value. So long as you don’t borrow the full cash value of your policy or surrender your policy, your life insurance will continue to build cash value over time.
Borrowing against your life insurance can have a lot of benefits when you’re strapped for cash or experiencing a financial emergency. However, it’s important to consider the risks before contacting your life insurance company about a loan or withdrawal.
Risks of Borrowing Against Life Insurance
Despite the benefits of borrowing money from your life insurance policy, significant risks also need to be considered before making any financial decisions. The risks of borrowing from your life insurance include the following:
Reduced death benefit. If unpaid at the time of death, a life insurance loan or withdrawal will reduce the death benefit paid to your beneficiaries after you pass.
Cash value limitations. In some cases, a policy’s cash value might not meet the cash value minimums required by the insurer. Every insurer has different rules and requirements regarding life insurance loans, so check with your insurance company to learn about their loan policies.
Loan limits. Like cash value minimums, life insurance companies often establish limits to the amount a policyholder can borrow from their policy. This can limit the amount of money you can borrow against your policy.
Lapses in coverage. As interest compounds on an unpaid life insurance loan over longer periods, the loan’s balance might exceed the policy’s cash value. In that case, the excess amount will be taxed as income.
Possible taxes and fees. Lapsed policies and unpaid loans with accrued interest can result in unanticipated tax bills and other fees. To avoid unexpected financial obligations related to your life insurance loan, speak with a financial advisor.
Because the risks of borrowing money against your life insurance policy can be significant, it’s important to consider the disadvantages before making any decisions. To avoid adverse financial outcomes for you and your family, consult a financial advisor before borrowing against your life insurance policy.
Borrowing Against Life Insurance: The Lowdown
Borrowing against your life insurance policy can be a good way to access money quickly when you need cash for necessary expenses. However, it can also have serious risks that can negatively affect you and your loved ones, including losing your life insurance coverage and reducing the death benefit paid to your beneficiaries.
To mitigate those risks, speak with a financial advisor before taking out a life insurance loan or withdrawing money from your life insurance policy.
Frequently Asked Questions
Can you cash out your life insurance policy while you’re still alive?
If you have permanent or whole life insurance, you can likely borrow cash against your policy while alive. Cash is usually borrowed from life insurance policies as a loan or withdrawal. Although borrowing from your life insurance can be an easy way to get cash quickly, it’s also risky since it reduces the death benefit associated with your policy.
Permanent or whole life policyholders also have the option to surrender their policy for its cash value, which is typically less than the death benefit. However, because this cancels the policy and ends your life insurance coverage, it should be considered a last resort. In addition, by surrendering your policy, you could also owe additional taxes and fees.
How much can I borrow from my life insurance?
The amount of cash you can borrow against your life insurance depends on your policy’s cash value, the type of policy you own, the length of time you’ve owned the policy, and your life insurance company. Although it’s not uncommon to be able to access around 90% of your policy’s cash value, newer policies usually have less cash value than more mature policies.
It’s important to remember that a policy’s death benefit, or “face value,” differs from its cash value. This is because your policy’s cash value refers to the amount paid into the policy rather than the amount your beneficiaries receive after your death. Because of that, the amount of cash value that you can borrow is usually much less than the policy’s death benefit.
Do life insurance loans have to be repaid?
Although most companies don’t require you to repay a life insurance loan, it’s often in your best interest to repay it. The outstanding loan reduces your death benefit, which can negatively impact your beneficiaries in the event of your death. Additionally, as interest accrues over time, you could be responsible for taxes if the policy lapses due to the loan exceeding its cash value.
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Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states.
After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in…
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Written by
Rachael Brennan
Licensed Insurance Agent
Benjamin Carr was a licensed insurance agent in Georgia and has two years’ experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.
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Reviewed by
Benji Carr
Former Licensed Life Insurance Agent
