How to Borrow Against Life Insurance (2024)

FAQs

How to Borrow Against Life Insurance? ›

Another requirement is to have enough cash value in your policy to use as collateral for the loan. Minimum amounts vary by the insurance company but it can take several years to build enough value to borrow against. If you have the right policy with enough cash value, you can request a loan.

One of the biggest advantages of borrowing from your policy is that policy loans have fewer credit and tax implications than other loan types. The IRS does not recognize policy loans as income, making them a tax-free funding source.

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.

The limit for borrowing money from life insurance is set by the insurer, and it's typically no more than 90% of the policy's cash value. When your policy has enough cash value (minimums vary by insurer), you can use it as collateral to request a loan from your insurance company.

You can withdraw up to the amount you've paid in premiums without paying taxes on the funds. Withdrawals will reduce the death benefit. Take out a loan. A life insurance policy loan allows you to borrow money from your life insurance policy.

If you repay all or a portion of the loan, options include periodic payments of principal with annual payments of interest, paying annual interest only, or deducting interest from the cash value. “Loans have an interest rate like any other type of loan," says Reich.

Life insurance policies, such as Farm Bureau Insurance's whole life policy, often come with a cash value component. As you pay your premiums, a portion of them goes towards building a cash value within your policy. Over time, this cash value can grow on a tax-deferred basis, and this allows you to accumulate wealth.

The timeline for borrowing against a life insurance policy depends on the type of policy and how quickly it accumulates a cash value. Typically, it takes time for the cash value to build up. Often, it can take many years or upwards of a decade to build up a sufficient cash value to make borrowing worthwhile.

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.

What is the cash value of a $25,000 life insurance policy? ›

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.

The Bottom Line. While life insurance does pay out a death benefit when you pass away, you could also use your policy while you're alive in certain cases. You may be able to withdraw accumulated cash value, take a loan against your coverage, access a living benefit rider or sell your policy.

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.

When you borrow against life insurance, these loans are taken out with the life insurance company rather than a bank or credit card company. They often come with a simpler approval process, since you technically own your life insurance plan's death benefit and cash value.

You can borrow from permanent life insurance policies that build cash value. These would typically include whole life and universal life (UL) policies. You cannot borrow against a term policy since there is no cash value associated with it.

Life insurance loans typically don't affect your credit because your policy is the collateral for the loan, and there's no set repayment schedule. There's no loan approval process, which means your credit score is unaffected when you get the loan.