Not all life insurance policies are just “set it and forget it.” Some are powerful financial tools — including the ability to borrow money from your own policy. But is that a smart move?
Let’s break down how life insurance loans work, when to consider them, and why borrowing against your policy can either help or haunt your future.
🔍 What Kind of Life Insurance Lets You Borrow Money?
To put it simply: only permanent life insurance policies accumulate a cash value you can borrow from. These include:
- Whole Life Insurance
- Universal Life Insurance (UL)
- Indexed Universal Life (IUL)
- Variable Life Insurance
💡 Term life insurance does NOT have a cash value — so borrowing isn’t an option.
💰 What Is the “Cash Value” in Life Insurance?
With permanent policies, a portion of your monthly premium goes into a cash value account. Think of it like a savings account attached to your policy.
Over time, the balance grows (based on interest rates or stock indexes depending on the policy type). And once it hits a certain level — you can borrow against it, usually tax-free.
🛠️ How Life Insurance Loans Actually Work
Here’s how to borrow money from your life insurance step-by-step:
- You request a loan from your insurer.
- They use your cash value as collateral and give you a check or direct deposit.
- You’re charged interest on the loan.
- You don’t have to repay it — but if you don’t, the loan is deducted from your death benefit.
📌 Example:
If your policy’s death benefit is $250,000, and you borrow $30,000, your beneficiaries might only receive $220,000 (plus interest deductions) if you don’t repay it before you die.
🧠 When Borrowing From Life Insurance Is a Smart Move
✅ You Need Emergency Cash Fast
No credit checks. No waiting weeks for a bank. The process is usually quick.
✅ You’re Between Jobs or Businesses
You may want to use it as a temporary income bridge without draining retirement savings.
✅ You Want to Avoid a Taxable Event
Unlike 401(k) withdrawals, a policy loan typically isn’t taxed — unless the policy lapses.
✅ You’re Using It Strategically
Some savvy investors borrow from IULs to fund investments, real estate, or even to help finance college — without touching credit.
⚠️ When You Should NOT Borrow From Life Insurance
🚫 You Don’t Understand the Fine Print
If you’re not crystal clear on the interest, repayment terms, and impact on your death benefit — don’t move forward.
🚫 Your Policy Is Still New
Early on, there may not be much cash value yet — and borrowing could eat away at what little growth is there.
🚫 You Don’t Plan to Repay It
While repayment is technically optional, unpaid interest can compound, and in time, the loan could outweigh the policy — causing it to lapse (cancel).
🚫 You’re Counting on the Full Death Benefit
Borrowing might shortchange your loved ones if you don’t have another way to make up the difference.
🧾 Tax Implications: Are Life Insurance Loans Really Tax-Free?
Yes — as long as the policy stays active, life insurance loans are typically not taxed. But there are exceptions:
- If the policy lapses with a loan balance, the IRS may treat it as a taxable distribution.
- If your policy is considered a Modified Endowment Contract (MEC), loans may be taxed differently.
💡 Pro tip: Ask your agent or carrier if your policy is a MEC before you borrow.
📉 How Loans Affect Your Policy’s Performance
Borrowing reduces your available cash value, which could affect:
- Interest/Dividend growth
- Long-term compounding
- Indexed crediting (in IULs)
Even if you repay the loan, some policies don’t fully restore lost growth — so borrowing may stunt your policy’s long-term performance.
🧮 How Much Can You Borrow?
Most insurers allow you to borrow up to 90% of the cash value. You’ll need to call or log into your insurer’s portal to see your exact loan availability.
💬 Pro tip: Some IULs even offer “wash loans” with little or no net interest when used for retirement income strategies.
🔄 Do You Have to Repay a Life Insurance Loan?
Technically — no. But here’s the kicker:
- Unpaid loans accrue interest
- Over time, this reduces your death benefit
- If the loan exceeds the total cash value, the policy could collapse
✅ If you repay the loan (even gradually), you can preserve the full policy benefits.
👨👩👧👦 What Happens to Your Policy When You Die?
If you still have a loan balance when you pass away:
- The remaining balance is deducted from your death benefit
- Your beneficiaries receive what’s left
📌 Example:
Original death benefit: $200,000
Outstanding loan: $40,000
➡️ Beneficiaries receive: $160,000 (minus any interest due)
🧭 Real-Life Scenarios
Good Use:
A 45-year-old uses a $20,000 loan from her IUL to start a side business. It takes off, she repays the loan, and her policy keeps growing.
Risky Use:
A 60-year-old borrows from his whole life policy and never repays it. Over time, the interest compounds. When he passes at 72, his death benefit is reduced by 50%.
✅ Key Takeaways
- Only permanent policies let you borrow — not term life
- Loans are typically tax-free, but can get taxed if the policy lapses
- Interest adds up — even if repayment isn’t required
- Borrowing can be smart — but only when it fits into your overall financial plan
💡 Final Thoughts: Should You Borrow?
Borrowing from your life insurance is like taking a loan from your future self.
Done right, it can be a lifeline or a power move.
Done wrong, it can cripple your policy and leave your loved ones with less.
If you’re not sure whether it makes sense, talk to a licensed insurance advisor — or just reach out to us for help.
👇 Get Expert Life Insurance Guidance
Whether you’re comparing policies or need help understanding cash value and how to borrow money from your life insurance policy — we’ve got your back.
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