If you need cash fast, it might be a good idea to borrow money from your life insurance policy. Doing so is fast and easy because there are no requirements. You can also use that money for anything you want, like covering medical bills, paying off your mortgage, or going on vacation. However, there are serious downsides to borrowing money from your life insurance policy and only certain policies allow you to do so. Read on to find out if this choice is the right one for you.
What type of life insurance policy can you borrow money from?
Only some life insurance policies have a cash value. They include permanent life, whole life, universal life, and final expense insurance policies. You can only borrow money from a permanent life insurance policy. This type of policy doesn’t expire if you pay your premiums, and some even have a cash value component. With permanent life insurance, your insurance company will usually put a portion of your annual or monthly payments in a cash fund which can earn interest as it grows. When your policy accrues enough cash value, you can:
- Withdraw cash from your policy
- Pay your premiums with the accrued cash
- Use the accrued cash to buy more coverage
- Use the accrued cash value as collateral to borrow money from the insurer
How does borrowing money from life insurance work?
When you borrow money from your life insurance policy, you’re essentially borrowing against the accrued cash value in that policy and you can only borrow up to a certain amount. Simply put, you’re putting up your policy as collateral. Therefore, the lender is unlikely to check your income and credit score. You normally can repay the loan when you can, but it’s better to pay it off as fast as possible because life insurance loans accrue interest, even if these interest rates are usually lower than for your typical loans. Treat borrowing money from life insurance like taking out any other loan. Make sure you’re able to repay it if you want the full death benefit and monitor the interest.
Contact your life insurance provider to start the process of taking a policy loan. Asking your insurer what will happen to your policy after you take out the loan is paramount. Depending on your insurer, you might have to pay the interest out-of-pocket or you’ll borrow interest. Insurers offer fixed and variable interest rates. With a fixed interest rate, you’ll know ahead of time what your loan interest will be, but variable interest rates are subject to change.
Understanding how the interest on your life insurance loan works is very important. Your loan could accumulate enough interest where its balance gets bigger than the policy’s accumulated cash value. In this case, your life insurance policy could lapse. Your beneficiaries won’t receive the full death benefit if you don’t repay the loan before you pass away.
Best Insurance To Borrow Money from
Lemonade allows its clients to borrow money from their life insurance. So how do you go about this? First, ensure that your policy has accumulated enough cash valuer.
Once you can do that, you can borrow from it or use it to make a monthly payment. Interestingly, people often use their life insurance to support themselves during retirement.
Contrary to what you’ve heard, borrowing from your life insurance can be a quick way to ensure that you are relatively stable financially.
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How much can you borrow from your life insurance?
It depends on your insurer and some policies have a cap on how much you can borrow. Usually, insurers will cap the loan at 90% of the cash value accumulated in your policy. Some will let you take a loan for the full amount minus the premiums. Because the insurer uses your policy’s cash value to secure the money borrowed, you’re not actually taking out that cash value for the loan. Your policy’s cash value will therefore still accrue interest.
Pros and cons of borrowing money from life insurance
| Pros | Cons |
| No credit or income check | It usually takes a life insurance policy many years to accrue a cash value, so you have to wait until this option is available for you |
| Can repay the life insurance loan when you can | Reduced death benefit if you don’t repay the loan |
| Low-interest rates than personal or credit card loans | The accrued interest is taken out of your accumulated cash value |
| Can deduct the loan’s amount from the death benefit to repay the loan | If you still owe money when your policy ends, you’ll also owe tax on that money |
When should you consider borrowing money from life insurance?
- When you think your family doesn’t need your death benefit anymore
- When you don’t qualify for a standard loan
- When other loan options have higher interest rates
- When you can’t afford your life insurance policy premium
However, keep in mind that there can be some serious disadvantages to borrowing money from life insurance. The loan’s interest may add up to a point where you can’t pay it anymore. In this case, your death benefit will be depleted. If you still think your family would benefit from that death benefit, consider other options. Also, if you end up owing more money than the policy’s cash value, your policy will lapse, leaving you in a position where you have to figure out how to subsidize your family after your passing. And if the policy lapses, you’re going to have to pay taxes on the accumulated cash value. Keep in mind that borrowing money from your life insurance policy is basically the same as taking money out of a savings account. Understand all the disadvantages before you take this step. Try consulting an expert before borrowing money from life insurance to understand the tax implications. Perhaps a financial advisor or accountant can steer you in a direction that makes more sense for your specific situation.
What are your alternatives if you need money fast, but don’t want to borrow money from your life insurance policy?
A way to secure yourself from becoming indebted to a lender is just cashing out your life insurance policy. Even though this has its own downsides, you’ll be able to get all your accrued cash. Remember that most insurance companies only let you cash out after a couple of years. If you’re over 65 and want to borrow from life insurance, think about adding an overloan protection rider to your loan, as well. With it, your policy will remain intact even if you can’t pay the loan. Otherwise, apply for a loan through a bank or financial institution.
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