How to Borrow From Your Life Insurance Policy

by Jackie Lohrey ; Updated July 27, 2017

The cash value of a permanent life insurance policy can be a quick source of funds during a financial emergency. Unlike term insurance, which pays death benefits only if you die within a specified term, permanent life insurance -- including whole, universal, variable and variable universal -- can provide benefits during your lifetime. Lower interest rates and tax benefits, combined with no restrictions on using borrowed funds, make a life insurance loan an attractive option for many consumers, according to online comments by Monica J. Lindeen, Montana Commissioner of Securities and Insurance and Secretary-Treasurer of the National Association of Insurance Commissioners.

How a Life Insurance Loan Works

Permanent life insurance is more expensive than term insurance because it includes an investment component that builds cash value over time. According to the Illinois Department of Insurance, most policies start building cash value in two to three years. When you take out a loan, you’re essentially borrowing up to the amount that you would receive as a refund if you cancelled the policy. Although you pay interest on the loan amount, there are no minimum repayment requirements. If you do not repay the loan before you die, the insurance company will deduct the loan amount and any accrued interest from the death benefit payment your beneficiaries receive.

Identify the Cash Value

Review your annual statement or contact your insurance company to determine the exact cash and loan value of your policy. The cash value depends on the type of the policy, how long you’ve been making payments, and, in some cases, on economic conditions. For example, with whole and universal life there is guaranteed annual cash value growth. Although variable and variable universal life insurance have no minimum cash value guarantee, a variety of investment options increases the overall growth potential.

Determine the Loan Value

Most life insurance policies include surrender fees that allow an insurance company to recover sales commissions and related costs if you cancel a policy on which you’re still making payments. According to Bankrate, surrender fees typically apply on a decreasing schedule for about 10 to 15 years. For example, the fee might start at 10 percent of the cash value and decrease by 1 percent each year. If surrender fees apply, the amount you can borrow is the difference between the cash value and the surrender fee, commonly referred to as the loan or surrender value. This ensures the company will not lose money if you cancel a policy with an outstanding loan.

Apply for a Loan

Unlike with a conventional loan, a life insurance policy loan does not require a credit check. Once you determine the cash and loan value of your policy, simply fill out an online or paper loan request. In addition to providing policy and contact information, you’ll need to specify whether you want a specific loan amount or the maximum allowable loan. Even though the Internal Revenue Service does not consider the proceeds as taxable income, the application may include a section about income tax withholding. If it does, tell the insurance company that you do not want the company to withhold income tax.

About the Author

Based in Green Bay, Wisc., Jackie Lohrey has been writing professionally since 2009. In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.