Can You Borrow From Life Insurance?

Are you considering a life insurance loan to cover a significant expense or meet a financial need?

“Can you borrow from life insurance?” is a common question, and life insurance loans can be a valuable tool, but it’s important to understand the advantages, disadvantages, and implications before making a decision.

In this article, we’ll discuss the ins and outs of life insurance loans and how they might impact your financial future.


  • This article discusses the fundamentals of life insurance policy loans, including differences between permanent and term policies.
  • Potential borrowers must meet eligibility requirements such as a minimum cash value threshold and policy age or maturity to qualify for a loan.
  • Consulting with a trusted advisor can give you insight into available options & potential tax implications before taking out a life insurance loan.

Watch this short video to learn more about how I can help you find the best options from a wide range of insurance companies.

Understanding Life Insurance Loans

A life insurance policy loan enables policyholders to borrow against the cash value of their permanent life insurance policy. But how does a life insurance loan work? Recognizing the difference between permanent and term policies and grasping how cash value accumulates over time is crucial.

We will explore these concepts further.

Permanent vs. Term Life Insurance

The key distinction between permanent and term life insurance policies is that permanent life insurance policies offer the capability to take out loans, while term policies do not, though they can be converted to permanent policies.

Borrowing from a permanent life insurance policy can have its drawbacks, such as a reduction in coverage amount and potential policy lapse if repayment is not made. Therefore, comprehensively understanding the implications of borrowing from your policy before moving forward is vital.

Cash Value Accumulation

In permanent life insurance policies, a portion of the premium payment is allocated to a cash value account, which accumulates value over time. The cash value life insurance policy’s cash value serves as a form of collateral for the policy loan.

The cash value in a permanent life insurance policy can be used to purchase additional coverage to increase the death benefit, withdraw cash, or take out a loan from the life insurance company.

However, borrowing from the cash value component of a life insurance policy may lead to reduced earnings and fees, and if the cash value is depleted, the policy will be terminated.

Eligibility and Requirements for Borrowing

Eligibility for life insurance loans depends on meeting minimum cash value thresholds and policy age or maturity. No credit check or income verification is required for life insurance loans; however, there must be a certain amount of cash value built up in the policy.

Weighing the potential drawbacks of life insurance loans, such as the effect on death benefits and the risk of policy lapse if the loan is not repaid, is significant.

Minimum Cash Value Threshold

The policyholder must wait until the cash value reaches a certain threshold before being able to access the funds through withdrawal or borrowing. The minimum cash value requirement for borrowing from life insurance is generally no higher than 90% of the policy’s cash value.

This ensures that you have enough cash value in your policy to borrow against, providing a safety net for both you and the insurance company.

Policy Age and Maturity

Policy age and maturity can have an effect on loan eligibility. Generally, the more experienced and advanced the policy is, the higher the likelihood that the policyholder will be eligible for a loan. This is because older policies tend to have higher cash values, making them more suitable candidates for loans.

Additionally, some insurance companies may require the policy to be in force for a certain number of years before a loan can be taken out.

How to Apply for a Life Insurance Loan

After assessing your eligibility and deciding that a life insurance loan suits your needs, you can proceed with the application. Life insurance loans may be applied for online, via paper form, or by telephone.

Submitting a form is the first step of the process. After that, you need to prove your identity in order to complete it.

The funds will usually be deposited into your account within a few days of your application being approved.

Online Application

The procedure for applying for a life insurance loan online typically involves completing a form from the insurer. Certain companies provide the option to apply for a policy loan online, whereas others may require a paper application.

Generally, there is no formal approval process or credit check necessary for a life insurance loan. Upon submission of the application, the insurer will review it and disburse the loan amount upon approval.

Paper Form or Phone Application

For those who prefer a more traditional approach, paper forms and phone applications are alternative methods for applying for life insurance loans. To apply using these methods, you will need to contact your life insurance provider to obtain the necessary forms.

Once the forms are completed, you will need to submit them to your life insurance provider. Like online applications, there is no formal approval process or credit check required for paper forms or phone applications.

Advantages of Life Insurance Loans

Life insurance loans offer several advantages, including tax-free benefits and no credit check or income verification requirements. This makes them an attractive borrowing option for those who may not qualify for traditional loans or who are looking for a more discreet financial solution.

However, being aware of the potential risks and disadvantages that come with life insurance loans is also significant.

Tax-Free Benefits

One of the primary advantages of life insurance loans is their tax-free nature. The loan amount is not considered taxable income, and the death benefit of the policy remains exempt from taxation.

This tax-free benefit can be particularly attractive for those looking to borrow money without incurring additional tax liabilities.

No Credit Check or Income Verification

Another advantage of life insurance loans is that no credit check or income verification is required. This makes them an accessible borrowing option for individuals with poor credit or financial difficulties.

In comparison to traditional loans, life insurance loans can provide a more stress-free and straightforward borrowing experience.

Risks and Disadvantages of Life Insurance Loans

While life insurance loans offer numerous advantages, they also come with potential risks and disadvantages, such as the impact on death benefits and the potential for policy lapses.

Before taking out a life insurance loan, it’s important to consider these risks and implement strategies to reduce their impact.

Impact on Death Benefits

Borrowing against a life insurance policy can decrease the death benefit. If the loan is not repaid prior to the policyholder’s death, the insurance company will subtract the outstanding loan balance from the death benefit, reducing the amount received by the beneficiaries.

This is an important factor to consider when deciding whether to take out a life insurance loan.

Policy Lapse Risks

Policy lapses can occur if loans are not repaid, leaving the policyholder without coverage and potentially owing income tax. If the outstanding loan becomes too large, the policy will lapse, resulting in thousands of dollars of premiums paid with no coverage to show for it.

Additionally, taxes may be owed if the outstanding loan exceeds the amount of premiums paid. To avoid policy lapses, it’s important to monitor the loan size in relation to the cash value and make interest payments when feasible.

Repaying Your Life Insurance Loan

While repaying life insurance loans offers flexibility, considering strategies for quicker repayment can help avoid policy lapses and maintain death benefits.

A disciplined approach to loan repayment can help ensure that your life insurance policy remains intact and provides the necessary coverage for your loved ones.

Flexible Repayment Schedules

Life insurance loans have flexible repayment schedules, allowing borrowers to repay at their own pace. This flexibility can be advantageous for those who are unable to make regular payments or who wish to pay off the loan in a shorter time frame by making larger payments when feasible.

By taking advantage of this flexibility, borrowers can tailor their repayment plan to their individual needs and budget.

Strategies for Paying Off Loans Faster

Implementing strategies for paying off loans faster can help avoid policy lapses and maintain death benefits. Some strategies include:

  • Boosting the death benefit
  • Making timely payments of life insurance premiums
  • Taking out a loan
  • Creating a repayment plan

These strategies can ensure that your life insurance policy remains in good standing and provides the necessary coverage for your beneficiaries.

Consult with a Professional

Before borrowing from your life insurance policy, consulting with an advisor to discuss your needs and objectives, and to better understand the tax implications and potential impacts on loved ones, is a wise move.

They can provide guidance to policyholders in understanding their available options and evaluating their personal finances before borrowing from life insurance.

By carefully examining your financial situation, they can help you determine whether a life insurance loan is the right choice for you and provide guidance on:

  • Repayment strategies to minimize potential risks
  • Budgeting and managing your finances effectively
  • Exploring alternative options for borrowing or accessing funds

Working with a trusted advisor can provide valuable insights and expertise to help you make informed decisions about your financial future.


Life insurance loans can be a valuable financial tool for policyholders in need of funds. They offer tax-free benefits, no credit checks or income verification, and flexible repayment schedules.

See also: What is infinite banking?

However, it’s essential to be aware of the potential risks and disadvantages associated with life insurance loans, such as the impact on death benefits and the possibility of policy lapses.

Ultimately, understanding the ins and outs of life insurance loans can help you secure your financial future and protect your loved ones.

If you’re looking for expert guidance on finding the best options for your retirement, watch this short video to learn more about working with me.

As a trusted retirement planner with years of experience helping retirees plan their futures, I can provide personalized advice tailored to your unique goals and circumstances.

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