Can you borrow against a life insurance policy?

How soon can you borrow from your life insurance?

You can borrow from your life insurance policy as soon as you have sufficient cash value built up to borrow against (minimum amounts vary by insurer). Keep in mind that if you have a newer policy, it may take several years before it has accrued enough value for you to borrow against.

Are there other requirements to be eligible for a life insurance loan?

Primarily you need to have enough cash value in your policy. If your loan exceeds the cash value, the policy may lapse, so be aware of the rules and read the fine print. In addition:

• You need to be the policyholder.
• Your policy needs to be the right type to qualify. Term life policies are not eligible for loans.
• You need to pay your life insurance premiums regularly and payments should be up to date. Failure to pay your premiums could result in your policy's cancellation.

Pros of borrowing against life insurance

• Life insurance loans are generally income tax-free: The IRS won't recognize it as income, so there won't be tax on it. There are some stipulations, noted in the "cons" section below.
• Lower interest rates: Other types of borrowing may have higher rates, such as credit cards.
• No credit checks: If you have enough cash value in your policy, you won't be subject to credit checks or other approval processes.
• You can get cash without delay: Since life insurance loans don't have additional requirements, such as a credit check, employment verification, or minimum income requirements, you may readily get your funds.
• The cash value continues to grow: It can do so, even though you're borrowing against it.
• You can pay back your loan when you want to: There is more flexibility than with other loans, and you won't be tied to a repayment schedule.
• There are no restrictions on how you use the funds: Use your money however you want.

Cons of borrowing against life insurance

• Borrowing can impact the death benefit: If you die but haven't repaid the loan and still have a balance, it may impact the death benefit amount your beneficiaries receive.
• You need to pay interest on the loan: The interest may not be as high as other types of loans, but you still need to pay interest.
• You may owe taxes on the amount borrowed: That may happen if you stop paying your premiums and your policy lapses.

How do you pay back your life insurance loan?

You pay it back like any other loan, but you're not tied to a specific repayment schedule. Consider paying it back as soon as you can. The longer your loan is left unpaid, the more interest you'll end up owing.

As far as the mechanics of paying it back, check with your insurer. Loan payments may usually be paid in full or partial payments and are typically applied to the interest first and then to the principal. Your insurer may have various payment options.

How high are interest rates on a life insurance loan?

According to MarketWatch, interest rates on a life insurance loan typically range from 5% to 8%, much lower than the average rate for credit cards. That's why borrowing against life insurance can be a relatively affordable option for policyholders.

Are there alternatives to borrowing against life insurance?

Yes. Depending on what you want the funds for, you can borrow from a bank, such as a home equity line of credit. Or use a credit card, but that may come with a steeper interest rate. You may also consider a personal loan, whether you're planning a home renovation, need funds for a wedding, or want to consolidate debt.