How Quickly You Can Borrow From Your Life Insurance Policy

Borrowing against a life insurance policy can provide relatively quick access to cash, but only after the policy has built enough cash value to support a loan. How long that takes depends on the type of permanent life insurance you own, how the policy is funded and how quickly its cash value grows. Knowing when those funds become available can help you plan ahead and avoid relying on a policy loan before your coverage is ready to support one.

Consider speaking with a financial advisor before making big financial moves like borrowing from your life insurance.

How Borrowing Against Your Life Insurance Works

Life insurance loans allow you to borrow money from the cash value that you build up over time as you pay the premiums on your permanent life insurance policy.

These loans typically have favorable interest rates and none of the stringent eligibility requirements of traditional loans. You can repay the loan at your own pace or even forgo repaying it altogether. But keep in mind that whatever isn’t repaid may be deducted from your policy’s death benefit, reducing or eliminating your loved ones’ payout when you die.

To borrow from your policy, you’ll first need to verify that your policy includes a borrowing provision. Next, check the cash value of your policy and ensure it’s large enough to support your loan. You’ll then request a policy loan from your insurer, review the requisite documents and sign the loan agreement to receive your money.

How Soon Can You Borrow from Your Life Insurance Policy?

Life insurance policies are often viewed as a financial safety net, providing peace of mind and security for loved ones in the event of the policyholder’s passing. However, many people are unaware that certain types of life insurance, such as whole life or universal life policies, can also serve as a source of cash value that you can borrow against during your lifetime. This feature makes these policies a versatile financial tool, allowing policyholders to access funds for emergencies, major expenses or investment opportunities.

Rules for Borrowing from Your Life Insurance

First and foremost, loans are only available within policies that include a cash value. This means you’ll need a permanent life insurance policy – like whole, universal or variable life insurance – to borrow money from it. Since term life insurance does not include a cash component, borrowing from these policies isn’t permitted.

Next, most insurers will typically only allow you to borrow up to 90% of the cash value that you’ve accumulated. So if you have a $10,000 cash value, you’ll be eligible for a $9,000 loan. If your borrowing needs exceed the cash value, you’ll need to look elsewhere for additional funds.

How Long It Takes to Have Enough to Borrow

How soon you can borrow from a life insurance policy depends primarily on how quickly the policy builds cash value. Only permanent policies, such as whole life and universal life insurance, typically allow policy loans, and you generally cannot borrow more than the amount the insurer makes available based on your accumulated cash value.

In the early years of a policy, cash value may build slowly because part of your premiums goes toward insurance costs, fees and other policy expenses. As a result, it may take several years before there is enough value to make borrowing worthwhile. Some policies are designed to build cash value faster, while others may require a longer accumulation period.

The timeline can also depend on how much you pay in premiums and how the policy is structured. Whole life policies generally follow a predetermined cash-value schedule, while universal life policies may accumulate value based partly on interest credited to the account and the cost of insurance. Paying higher premiums, when permitted, may help cash value grow more quickly.

Once sufficient cash value is available, obtaining the loan itself can be relatively straightforward because you are borrowing against your own policy rather than applying for an unsecured loan. However, insurers may limit the percentage of cash value you can borrow, and interest begins accruing on the outstanding balance. Reviewing a current policy illustration or contacting the insurer can show you exactly how much is available and how a loan could affect future cash value and the death benefit.

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Reasons You Might Want to Borrow from Your Life Insurance

Borrowing from a life insurance policy can give you access to cash without applying for a traditional personal loan or selling investments. Policy loans are generally available only from permanent life insurance policies, such as whole life or universal life, that have accumulated enough cash value.

One reason to borrow is to cover a large or unexpected expense, such as a medical bill, home repair or temporary loss of income. Because the loan is secured by the policy’s cash value, insurers typically do not require a credit check, and the borrowing process may be faster than qualifying for other forms of financing.

Policy loans can also provide flexibility for planned expenses, including education costs, a home purchase or a business need. Borrowers generally do not have to follow a fixed repayment schedule, although interest continues to accrue and an unpaid balance can reduce the policy’s death benefit.

Another potential advantage is tax treatment. Money borrowed against a policy is generally not treated as taxable income as long as the policy remains in force, but tax consequences can arise if the policy lapses or is surrendered with an outstanding loan. Before borrowing, it is important to compare the loan’s interest rate and long-term effect on the policy with other financing options.

Potential Benefits of Borrowing from Your Life Insurance

Life insurance loans may be attractive for a variety of reasons, including their low interest rates and general lack of eligibility requirements. Here are some of the most notable benefits of borrowing from a life insurance policy.

Lower interest rates: The interest rates on life insurance loans are typically lower than other loans and credit cards.
Easy to qualify: Life insurance loans don’t have the same eligibility requirements typically associated with other loans, like a minimum credit score, employment verification or a minimum income. And because your policy’s death benefit serves as collateral, you won’t have to put up other assets as collateral to qualify for a loan.
Tax-free income: Since the IRS doesn’t classify life insurance loans as income, you typically won’t have to pay taxes on the money you borrow from your policy.
Repayment isn’t required: Since the cash value that you borrow from is your money, you technically don’t have to repay a life insurance loan. However, failing to repay your loan means your beneficiaries will receive a reduced death benefit – or none at all.

Disadvantages of Taking Out a Loan from Your Life Insurance

A couple reviews a life insurance loan document.

Despite the potential benefits, some points might be of concern when borrowing from your life insurance. While borrowing against the cash value of a life insurance policy may seem like a convenient financial solution, it comes with notable drawbacks that policyholders should carefully consider.

Death benefit reduction: As mentioned earlier, if you don’t repay the loan, the death benefit is reduced by the loan amount. For example, if you have a $200,000 policy and borrow $50,000 that you don’t repay, your beneficiaries will only receive $150,000.
Policy lapses: Your coverage could lapse if the outstanding loan amount, including the interest owed on the loan, exceeds your policy’s current cash value. You could lose your coverage altogether.
Tax consequences: If your policy lapses, you could end up owing taxes on the investment gains or interest that your cash value accrues.

Bottom Line

Borrowing from your life insurance policy can be an easy and cost-effective way to free up cash for all kinds of potential expenses. How quickly you can borrow from your policy, however, depends on how much money you need and how large of a cash value you’ve built within your policy. Keep in mind that insurers typically only allow you to borrow up to 90% of your cash value and money that isn’t repaid can reduce the death benefit your beneficiaries will receive when you die.

Life Insurance Tips

A financial advisor can also help you assess your life insurance needs and purchase a policy. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Do you need life insurance but aren’t sure how much coverage to purchase? SmartAsset has a tool designed to help you determine how much life insurance coverage you’ll need to ensure your loved ones are taken care of.