Life Insurance Loans: Loans From Whole Life Insurance Policies

Key Takeaway

Whole life insurance policies often allow policyholders to withdraw a loan from the cash value that may have accumulated in their policy, and the type and amount of the available loan is dependent on that cash value. There are several scenarios in which borrowing against your life insurance is an attractive solution to financial difficulties. But insurance loans can also negatively impact the value of your life insurance policy. That is why you should  seek advice from a licensed financial advisor or a tax professional before making any decisions regarding taking out a loan from your life insurance policy.

A safe with a parachute representing loans from life insurance policy.
A safe with a parachute representing loans from life insurance policy for mobile.

Borrow From a Whole Life Insurance Product

    Provided your whole life insurance policy has sufficient cash value, you may be able to borrow an amount that is usually tax-free, yet which includes an interest charge. Depending on your life insurance policy, you may have two loan options: 

    • Repaying the loan 
    • Not repaying your loan, which might result in reduced benefits  

    While the specifics will depend on product to product, there are rules and limitations on the amount and potentially the frequency that you may be able to borrow from your life insurance policy, and you will often find that your whole life policy must have reached a certain level before you can borrow against it, usually with a percentage cap. The cash value in life insurance policies increases at different rates based on factors such as the life insurance product type and how cash value accumulates, so the amount of time you may need to wait before becoming eligible for borrowing will vary. 

    If you require a loan to cover financial emergencies such as medical bills or urgent home improvements, and you comply with the relevant loan eligibility criteria, you could potentially borrow money from your life insurance policy without any credit checks required. 

    Policyholders who cannot access a conventional bank loan or require cost-effective borrowing as quickly as possible may find that taking out a loan against their whole life insurance policy could be a viable alternative. They may also be able to borrow against their life coverage policy while waiting for approval on another borrowing solution. 

    Taking Out a Cash Value Loan From a Whole Life Insurance Policy

    We mentioned that some life insurance policies accrue cash value at different rates, and depending on the amount of the premiums paid into their policy, many policyholders may need to wait for several years before their policy has sufficient cash value to borrow from. While this time period may vary, an insurance provider can only grant a loan request once the policy has sufficient cash value  to fund the loan, using the insurance policy value as loan security.

    Repaying The Life Insurance Policy Loan

    Deciding whether or not to repay the life insurance loan may depend on the terms offered, but most insurance companies do not require a formal repayment schedule to be followed, and some don’t require the loan to be repaid at all. However, not repaying the loan may negatively impact your policy, or could result in an increasing interest charge. Loan interest may be payable annually and can be either variable or fixed, so it is important to evaluate the conditions of your insurance policy and plan for repayments accordingly. It's also a good idea to discuss your loan terms with a trusted financial advisor.

    Interest Rates on Your Life Insurance Loan

    Loan interest payments may be directly payable, accumulate over time, or be deducted from the cash value. Repaying the loan slowly or not repaying it at all could negatively impact your policy, including the death benefit.

    How Loans Impact Policy Death Benefits

    Taking out a loan against the account value could impact the death benefit if the loan is not repaid, since the insurance company will typically deduct the loan and accumulated interest from your death benefit –and therefore reduce the death benefit that is ultimately payable to your beneficiaries.

    Advantages When You Borrow Against a Whole Life Insurance Policy

    There are several scenarios in which borrowing from  your life insurance policy is an attractive solution to financial difficulties, including the following: 

    • Securing funds when you are ineligible or otherwise cannot access a loan from your bank or credit union 
    • Competitive interest rates, which may be lower than those available through personal loan products 
    • Choosing a borrowing option that does not require you to use your home mortgage as collateral 
    • Having the flexibility to structure your loan repayments as best suits your personal circumstances. In other cases, a whole life policyholder may be concerned about missing loan payments and the potential for their insurance policy to lapse. However, if there is sufficient cash value remaining in the policy even after the loan is taken, the insurance policy will likely remain in effect  

    Considerations to Be Aware of When Borrowing Against Life Insurance Policies

    As with any loan borrowing, it is important to be conscious of the terms and potential drawbacks and to have thought about when or if you intend to repay the insurance loan. Most whole life insurance policies will charge an interest fee on policy loans. 

    Interest may accrue on the life insurance loan rather than being immediately payable. However, if you do not repay the insurance loan, the balance owed on the loan will typically be deducted from the death benefit should the policyholder die before the loan is repaid. 

    Depending on the amount borrowed and any threshold limits on the percentage of available cash value, the interest owed on the loan could potentially accrue to a higher value than the payable death benefit. In this scenario, there is the possibility that your whole life insurance coverage will lapse, which may have further tax implications if your insurance loan is subsequently considered a source of income. This may be a crucial factor if you intend to use your life insurance coverage to leave an inheritance or financial support for your family members or partner. 

    Irrespective of the reason for the loan, we advise you to seek advice and guidance before making any decisions from a trusted financial professional. 

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    The information above is for educational use only and does not represent insurance, tax or legal advice. It is not a recommendation or solicitation to buy insurance. Please talk to your licensed insurance agent for more information about life insurance and your needs. Please consult with the appropriate professional for tax or legal advice. Guarantees are backed by the claims-paying ability of the issuing insurance company. 

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    Article Author: Meredith Bell
    Author Bio: Meredith joined Everly in 2022 and has 20+ years of experience in the life insurance industry. She has held various roles in advertising, marketing, communications, sales and distribution support, and product development. Outside of the office, Meredith lives with her daughter Kennedy and their dog Mavis. Meredith enjoys cooking, camping, gardening, hiking, and bourbon (though not always at the same time). She is a live music enthusiast and an avid reader. Her favorite quote is by Thomas Jefferson: "I cannot live without books." Meredith agrees, but would add cheese, movies, and dogs to that list.

    Policies are issued by Everly Life Insurance Company (“Everly Life”), Topeka, KS. Everly Life is not licensed in the state of New York and does not solicit or transact business in New York.

    A.M. Best's 15 ratings are a measure of claims-paying ability and range from A++ (Superior) to F (in Liquidation). Ratings are current as of January 25, 2024 and subject to change at any time. While ratings can be objective indicators of an insurance company's financial strength and can provide a relative measure to help select among insurance companies, they are not guarantees of the future financial strength and/or claims-paying ability of a company and do not apply to any underlying variable portfolios. The insurance agency from which a policy is purchased, and any affiliates of those entities, make no representations regarding the quality of the analysis conducted by the rating agencies. The rating agencies are not affiliated with the above-mentioned entities, nor are these entities involved in any rating agency's analysis of the insurance companies.

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