When you experience a financial emergency, it’d be nice if you had a fund you could just dip into to handle it without the hassle of tons of research and filling out applications. It would surprise a lot of people to know that this is actually possible with a life insurance policy. About 50% of Americans own life insurance.1 If you’re one of them, you could borrow from it.
To learn how soon you can borrow from your life insurance policy, we will break down all the basics you need to know about life insurance policy loans and how they work.
Why Do People Have Life Insurance?
People obtain life insurance for a multitude of reasons. According to 2023 statistics from LIMRA and Life Happens, these are the most common reasons people buy life insurance from an insurance company2:
- 82% Burial/final expenses
- 68% Wealth transfer
- 60% Income replacement
- 66% Supplement retirement income
- 50% Pay off mortgage
Which Insurance Policies Can You Borrow Money From?
If you have insurance, it may be possible to borrow money. Take a look at a few different insurance policies below and whether they usually allow loans.
| Type of Life Insurance Policy | Allows for Loans? | Cash Value Component? |
| Term Life Insurance | No | No |
| Whole Life Insurance | Yes | Yes |
| Permanent Life Insurance | Yes | Yes |
| Universal Life Insurance | Yes | Yes |
| Variable Life Insurance | Yes | Yes |
| Indexed Universal Life Insurance | Yes | Yes |
As you can see, you can not get a life insurance loan from any policy out there. In order to get life insurance policy loans, there must be a cash value component, which can be found in whole life insurance and permanent life insurance policies. A whole life or permanent life insurance policy has no expiration date.
Even though the premiums are higher, all the money spent to pay premiums over the death benefit is invested by the life insurance company. As more money is added to the savings account through premium payments, you build up enough cash value to be available for borrowing money as needed.
Permanent life insurance policies provide policyholders with both the death benefit and the invested cash value built up through premiums.
How a Life Insurance Policy Loan Works
Once there is enough cash value in your permanent life policy, you will be able to borrow money from it with ease through a life insurance loan. The total cash value must go beyond the death benefit for a life insurance policy loan to be possible, meaning you cannot borrow against your policy immediately.
Life insurance policy loans are incredibly straightforward after you’ve built up enough cash value. When you have a medical bill to cover or some other big emergency that comes up in your life, you can easily rely on the cash value through a policy loan without needing to jump through the hoops required with a bank loan.
A policy loan won’t affect your credit. You don’t need to go through an entire application process or undergo a credit check. You don’t need to tell the life insurance company what you need the money for, as you are essentially only borrowing from yourself.
How Soon Can You Borrow From a Cash Value Life Insurance Policy?
How soon you can borrow from your life insurance depends greatly on your policy, the size of your premiums, and your death benefit. How quickly you accumulate cash value over the death benefit depends on so many factors it can be hard to say precisely when you will be able to take out a policy loan.
There needs to be enough of the policy’s cash value accrued in the savings account to equal the amount you wish to take out as a loan.
Pros and Cons of Borrowing from Your Insurance Policy
It may be possible to borrow from your insurance, but before you do, it’s critical to weigh the pros and cons. Read about the advantages and disadvantages below.
Advantages of Life Insurance Loans
There are advantages of insurance loans, such as:
- No Impact on Credit Score — You don’t need to worry about an approval process or a credit check with a policy loan. You can simply borrow some cash with no questions asked. A policy loan will not show up on your credit report either. Since the cash value belongs to you, it is like you are borrowing from yourself.
- Flexible Repayment Terms — There are no set terms for a cash-value loan, meaning you can set your own repayment schedule.
- Lower Interest Rates — While there is a policy loan interest rate, it is likely to be lower than both personal loans and credit cards, which could save you a significant amount of money.
- No Income Taxes — Life policy loans are not recognized as income by the IRS, so the loan balance is free from income taxes.
Drawbacks of Life Insurance Loans
There are several disadvantages of borrowing money through insurance loans. It’s critical to be aware of the drawbacks before making a final decision regarding your life insurance cash value.
- Accessibility — A considerable drawback for policyholders is the amount of time they may have to wait until they have a value sufficient to access cash. It may take several years until there is enough cash value for a loan amount you might need.
- Risk of Reducing the Death Benefit — If you cannot afford to pay back the loan in an orderly manner, the decrease in cash value could be a significant risk. Not paying off the loan in your lifetime means that your family will not receive the full death benefit they were intended to receive.
- Possibility of Policy Lapse — The loan amount and accrued interest could exceed your policy’s cash value. If this were to happen, your policy could lapse, and you could lose your coverage. It is necessary to pay off your loan in a timely manner despite there being no repayment schedule so you do not risk losing your coverage.
- Interest Payments — While interest rates are lower than bank loans, many people might not like the idea of interest payments on their own invested cash.
What To Avoid With Life Insurance Policy Loans?
While there is no timetable you must follow with a life policy loan, it is important that you still pay it back as soon as you are able. Not only will the interest increase the loan balance the longer you wait, but you are risking the size of the death benefit as time passes.
When taking out a policy loan, you must do everything you can to avoid reducing the policy’s death benefit. Don’t allow an outstanding loan to diminish the survivor benefit, which is the true purpose of life insurance. Since life is unpredictable, it’s never a good idea to leave an outstanding loan balance unpaid for too long as you are risking that the cash pay-out for survivors will be significantly less than it would have been otherwise.
Additionally, if you take too much cash out, the value may not meet the requirements that ensure your guarantee. With permanent life insurance, the cash value to maintain your guarantee may be quite high, so you will always want to double-check that you are not borrowing too much. Some life insurance companies may even charge a higher premium if your cash value does not remain at the required levels.
Alternatives For Quick Financing
If your life insurance policy does not have cash value to borrow from, there are other alternative methods out there for you to get the funding you need.
Personal Loans
A personal loan might be the best option as the funds can be used for a multitude of purposes. Personal loans come in all different shapes and sizes, and you can qualify for them with all manner of credit scores.
Unfortunately, you will likely face a higher interest rate with a personal loan than you might have with a policy loan. However, without cash-value life insurance, an online personal loan could be the best way to quickly get the emergency funding you need.
Online Payday Loans
Payday loans are one-payment loans that almost anyone can get quickly. The main qualification criteria is income, which means you may be eligible despite poor credit. These are small-dollar loans with very short loan terms.
But be warned, as many people struggle to repay payday loans due to high-interest rates and fees. Most lenders expect complete repayment (principal and interest) within two weeks. If you can’t pay, the payday lender will likely enforce a loan rollover, which will create more financial issues.
Quick Cash Loans
A quick cash loan is any type of loan that offers same-day funding for unforeseen emergencies. Popular quick cash loans include the following:
- Credit card cash advances
- Employer advances
- Pawn shop loans
- Car title loans
Quick cash loans can be very convenient. For example, you can pawn items for 200 dollars at a local pawn shop. However, you should know that quick cash loans may come with higher than usual rates because the credit requirements are typically nonexistent. Many lenders charge higher fees to offset the risk of lending to individuals without a good credit history. So, while you may get fast money, you will end up paying a lot for the convenience.
Bank Loans
Bank loans typically require a longer application process. They also tend to have stricter qualification standards, which can be difficult for everyone to meet. If you do not have perfect credit, then you may not qualify for a traditional bank loan.
Bad Credit Loans
Bad credit loans are designed for low-credit borrowers. These loans do not typically require a credit check. As long as you have the ability to repay, you may qualify for a loan. But a bad credit loan is a high-cost loan. The amount you pay to borrow funds may be substantial and not worth the cost of the small loan.
Frequently Asked Questions About Life Insurance Loans
While the article mentions that whole life and permanent life insurance policies generally qualify for loans, it’s always good to double-check with your life insurance company to confirm your policy’s eligibility for a life insurance policy loan.
Interest rates can vary among life insurance companies. It’s crucial to understand the rate you’ll be charged on a policy loan to make an informed decision.
If you’ve already taken out a life insurance loan, you might wonder if you can take another. This largely depends on the terms of your life insurance policy and the cash value available.
The maximum amount you can borrow through a life insurance policy loan is generally based on the cash value of your policy. But how do life insurance companies calculate this? Knowing the formula can help you plan better.
Missing a repayment may lead to increased interest and a potential reduction in your policy’s death benefit. In extreme cases, your policy could lapse.
The existence of a grace period depends on your policy and insurer. If available, it’s usually 30 to 60 days to pay without penalty.
Yes, you can generally make changes like updating beneficiaries or payment methods. However, some changes may require prior approval from the insurance company.
A Word of Caution From CreditNinja on Policy Loans
You may be able to contact your insurance company and borrow from your insurance policy. However, there are several disadvantages. If you need money quickly, consider applying for one of our versatile personal loans. CreditNinja offers online installment loans for life’s unexpected expenses. Read our customer reviews and learn about our 3-step online process.
All financial decisions have long-lasting effects, but you have the power to develop good financial habits and obtain financial freedom.
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