Is Borrowing Against Life Insurance An Option?

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There’s a certain comfort level knowing those closest to you will be financially taken care of when you pass away.  And, that’s exactly what a life insurance policy does when that time comes. But, what if you need to access to funds now? So, the question remains: Is borrowing against life insurance an option?

When you’re busy with life, having this added level of security helps ease your mind. Just knowing those left behind, won’t end up in financial dire straits because of your demise.

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No matter who you are, medical bills, emergency home repairs, and other surprise expenses can take a toll on anyone’s financial situation.  Or, worse yet, don’t have an emergency fund established.

If increasing your cash accounts is something you want to work on, then I suggest you read: Build Your Savings With Low-Risk Laddering Strategies.  It entails what your cash cushion should entail, and includes your long-term savings goals as well.

In the event those cash accounts are looking a little on the anemic side, it can be difficult to cover those unwanted surprises.  That is, until you do an internal audit as to where else you may have some extra cash stashed away.

The Two Types of Life Insurance

By doing a quick brain-check, it may lead you down a path, directing you towards your permanent life insurance policy.  And, where you ask yourself — is it possible to borrow against my life insurance?

The answer is yes. But it depends on what type of life insurance policy you own.

Bottom line, there are only two types of life insurance, and they are:

  • Temporary life insurance
  • Permanent life insurance

Borrowing from Temporary Life Insurance (Term)

Term life insurance policies can also be called:

  • Guaranteed Level Term which is also known as Specified Term
  • Decreasing Term which is also known as Mortgage Term Insurance
  • Group Term which means you are being pooled with a large group of people and is usually age-banded

Question 1: If you own a temporary life insurance policy, can you borrow money from it?  No

Here’s why – A term life insurance policy is pure life insurance, and this means there is no cash accumulation to borrow from.  And those premiums you’re paying, they are being used to cover the cost of insurance of the policy.

If you’d like a little more insight as to the many term policies available, check out: A Term Policy Can Be The Most Expensive Policy You’ll Ever Purchase, as I encourage you to do your research!

Borrowing from Permanent Life Insurance (Universal Life & Whole Life)

A permanent life insurance policy provides the following benefits:

  • You have a level premium that will never increase during your lifetime
  • You have a guaranteed death benefit that will never decrease during your lifetime
  • Your policy accumulates cash value, which is tax-deferred

Question 2:  If you own a permanent life insurance policy, can you borrow money from it?  Yes

The accumulation of cash value within this policy provides you the option of taking out a loan.

If you’re considering a permanent life insurance policy, specifically a whole life policy, then I suggest you read: Insider Tips of Whole Life Insurance You Need to Know.  As always, before purchasing any life insurance policy, whether it’s temporary or permanent, do your research!

Taking A Loan from Your Permanent Life Insurance Policy

Now that you know you can take a loan out on your permanent life insurance policy, how does it work?

According to Investopedia, the benefits of taking out a policy loan on your life insurance include lower interest rates compared to bank loans, and no mandatory monthly payments.

If you take a loan out on your existing permanent life insurance policy, that policy will remain intact. Any future premium payments you make can be applied to the outstanding loan, lowering your balance.  So, in a nutshell, you’re paying yourself back.

There are policies available where you can take a maximum loan amount of 100% of the Guaranteed Cash Value. But understand that for any outstanding loan (plus any interest charged) that’s not paid back before your death – will be reduced from the Death Benefit proceeds paid to your beneficiaries.

Accelerated Death Benefit [ADB] Endorsement

This endorsement is where your life insurance can benefit you while you’re living. If you have recently been diagnosed with a terminal illness, and have less than 12 months to live, the Accelerated Death Benefit (ADB) endorsement affords you the option of requesting a 50% advance of your death benefit. This will be predetermined in your life policy.

As a reminder, with an outstanding loan that hasn’t been paid back prior to death, the same applies to the ADB endorsement.  Any outstanding loan, plus any interest charged, that’s not paid back before your death – will be reduced from the Death Benefit proceeds paid to your beneficiaries.  

Riders + Endorsements

There are countless riders, endorsements, and benefits to choose from when you purchase a life insurance policy.  And, your life insurance policy may already have some of these added benefits (at no cost to you) just because it’s just part of the policy.  If you want the down-and-dirty as to what they really mean, check this out:  What Your Life Insurance Riders & Endorsements Mean.

To recap, the important points covered in this post:

  • You may borrow from your Permanent Life Insurance Policy, but not from a Temporary Life Insurance Policy.
  • Depending on your policy, you may be able to borrow up to 100% of your policy’s Guaranteed Cash Value.
  • If diagnosed with a terminal illness, you may qualify for an Accelerated Death Benefit endorsement where you can request a 50% advance of your death benefit amount.

Exercise Caution

As is the case with any loan you may be considering, it’s just as important to exercise caution if you are considering taking a loan against your life insurance policy.

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