If you need money fast, one option you might not know about is borrowing against your life insurance policy. If you have a permanent life insurance policy that has cash value, you may be able to access funds to pay for unexpected costs — like medical bills or car repairs. Longer term goals, like funding an education, may also be a possibility.
Taking the life insurance loan route can be a quick and convenient way to get needed cash without jumping through hoops, since you’re effectively borrowing your own money. There are no credit checks, and it doesn’t affect your credit score. You’re also not required to pay taxes on it.
However, as good as this option sounds, it’s important to see the whole picture. Life insurance loans come with their own set of costs and risks that could affect you or your beneficiaries down the line. Here’s what you need to know about borrowing against your life insurance.
The types of life insurance policies that allow borrowing
It’s important to know upfront that you can only borrow against certain types of life insurance policies that build cash value. These are permanent policies such as whole life, universal life, and final expense. If you have term life insurance, generally you won't be able to access the money in your policy since it’s designed to provide coverage for a specific period and does not build cash value. If you are not sure which type of life insurance policy you have, be sure to check your policy documentation.
Here’s a deeper look at four main types of life insurance:
Whole life insurance. This type of policy offers lifelong coverage and builds cash value slowly but steadily over time. Premiums are fixed, and part of each payment goes toward building the cash value.
Universal life insurance. Similar to whole life, universal life is a permanent policy that also includes a cash value component, but it offers more flexibility in premium payments and death benefits.
Final expense insurance. This type of insurance is often referred to as funeral or burial insurance and is used to cover medical bills or burial expenses after you pass away. There are both permanent and term options for this type of insurance. If you choose permanent, you can borrow from the savings component of the policy.
Term life insurance. This type of policy is usually the most affordable. You pay a fixed premium for a specific time, like 10, 20, or 30 years, and it only pays a death benefit if you pass away during that term. Term life insurance has no cash value, so you can’t borrow against it. If you have term life insurance, there are other types of fast lending options to consider, such as
same-day loans,
401(K) loans, and
cash advances.
How to borrow against your permanent life insurance policy
A life insurance policy loan means that you can use the money you have already paid into your insurance plan to access cash quickly. Your insurer acts as your lender, and your policy acts as loan security.
The amount you can borrow depends on your insurer’s guidelines. Many insurers allow you to borrow up to 90% of your policy's cash value. That means if your policy has built up $10,000 in cash value, you might be eligible to borrow as much as $9,000.
However, insurers usually set minimum cash values before you can borrow against your policy. These vary between insurers, but be aware that if your life insurance policy is new, it might take some time before there’s enough cash for you to borrow against. For instance, some policies may require five or even ten years of regularly paying your premium before you can access a loan.
An advantage of borrowing from your life insurance is that you will usually get relatively low interest rates compared to other kinds of loans, like personal loans or credit cards. Rates typically range from 5% to 8%. But the rate you’ll be offered will depend on what insurance company you use and your personal circumstances.
The pros and cons of borrowing against your life insurance
Borrowing against your life insurance isn’t all good or bad. It depends on your circumstances. Here’s a quick look at the advantages and disadvantages:
Pros
No taxes. Life insurance loans aren’t considered taxable income as long as the policy remains active.
No credit checks or applications. You’re essentially borrowing from yourself, so you don’t have to go through the traditional loan approval process.
No impact on credit score. These loans don’t show up on your credit report and won’t affect your credit ratings.
Flexible repayment. Unlike traditional loans, you’re not locked into a fixed repayment schedule.
Cons
Reduced death benefit. Any unpaid loan balance (plus interest) will be deducted from your death benefit, reducing what your beneficiaries receive.
Policy lapse. If you don’t repay the loan and the interest accumulates, your policy could lapse, leaving you without coverage.
Potential tax consequences. If the policy lapses with an unpaid loan, the outstanding amount may be taxed as income.
Interest risk. Even though interest rates are lower than many other loans, interest still adds up over time if the loan isn't repaid.
3 reasons to borrow against your life insurance
If you’re considering borrowing money against your life insurance, it’s likely that you need to access money for something specific. Maybe your car broke down and you need a quick $2,000 for repairs, or your child needs braces and your health insurance won’t cover it.
Along with needing quick cash, there may be other reasons to opt for borrowing against life insurance — rather than taking out a personal loan or putting purchases on your credit card. For instance:
You want to avoid risking your home or other valuable assets. Unlike personal loans or home equity lines of credit, borrowing from your life insurance doesn’t require collateral like your house or car. Your policy’s cash value secures the loan.
You appreciate the freedom to repay on your terms. With a life insurance loan, you're not tied to a fixed monthly payment plan.
You don’t want to have to explain why you need the money. Many traditional loans require justification for how the funds will be used, and won’t lend you money if it’s not on their approved list. This doesn’t apply to life insurance policy loans, and you won’t be required to reveal what you want the funds for.
3 reasons to avoid borrowing against your life insurance
While borrowing from your life insurance policy can offer quick access to cash, it’s not the right solution for everyone. Depending on your financial goals, the type of coverage you have, or the risks involved, looking into other funding options may be a better choice.
Here are three reasons why you might want to think twice before taking out a life insurance loan:
You want to preserve the full death benefit for your beneficiaries. Any outstanding loan balance, including accrued interest, is deducted from your policy’s death benefit. If your life insurance is meant to provide long-term security for your family, reducing the payout could have serious consequences for those who rely on it.
You’re not confident you can repay the loan in a timely manner. Life insurance loans don’t require a set repayment schedule, but that flexibility can be a double-edged sword. If your budget is already stretched thin, it can be difficult to find the money to repay the loan which can erode your policy’s cash value or even cause the policy to lapse.
You may not be eligible to borrow at all. If your policy is new, borrowing won’t be an option. A permanent policy can take years of premium payments before enough value has accumulated to qualify for a loan.
Paying back your loan: What to know
One of the perks of borrowing from your permanent life insurance is how flexible the terms are for paying the loan back. You can choose your own repayment schedule because there are no mandatory monthly payments. So you can repay as much or as little as you like.
However, that doesn’t mean you should ignore the loan. The longer you wait to repay it, the more interest builds up. If the interest causes the loan balance to exceed your policy’s cash value, your policy could lapse. That not only means losing your life insurance coverage, but you could also face a tax bill on the borrowed amount. Importantly, if you die before your loan is repaid, the loan amount (plus interest) will be deducted from the death benefit.
Before taking out any loan — including a life insurance policy loan — it’s a good idea to review your policy, speak with your insurance agent, and look into alternatives. If you’re thinking about borrowing from your life insurance because you need immediate cash, you could also consider other options, like
Cash Out from EarnIn, which lets you access money that you’ve already earned. There are also various types of
personal loans to explore.
Access your earned money whenever you need it
With EarnIn’s innovative
Cash Out tool, you can access the money you’ve already earned without waiting for payday. Get up to $150 per day with a max of $750 between paydays, without having to pay interest or undergo credit checks. There are no mandatory fees for standard service. But if you need your cash even faster — as in minutes — you can opt for Lightning Speed
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Using EarnIn’s Cash Out tool means you can cover unexpected expenses without taking money from credit, savings, bank loans, or your life insurance policy — and risking your death benefit payouts. EarnIn has you covered with a simpler way to get the cash you need when you need it.
FAQs
Can my term life insurance be used to pay off debt?
No, term life insurance does not accumulate cash value, so you cannot borrow against it or use it to pay off debt during your lifetime. It’s purely a death benefit policy. However, if you have whole or universal life insurance, you could use a loan to consolidate high-interest debt — such as credit card debt — into a life insurance loan with a potentially lower interest rate.
How much a month does a $1 million life insurance policy cost?
Do life insurance loans show up on a credit report?
No, life insurance loans are not reported to credit bureaus. They’re private transactions between you and your insurer and do not impact your credit score.
