Ask the Life Insurance Expert

How can I find out if I can borrow on my life insurance policy?

I'm assuming you have permanent life insurance (such as whole life, universal life or variable universal life) which covers you for the duration of your lifetime and features a cash value component. If you have term life insurance, you are covered for a specified number of years (usually 10, 15, 20 or 30) and do not have a cash value component. You can't borrow against a term life policy.

Permanent life insurance premiums go toward a cash value account that grows tax-deferred over time. The growth is slow at first, but earnings pick up speed after several years. The amount in this account depends on your policy and the number of years you've had it.

Once you've accumulated enough cash value (known as being “paid up”), you can use it to cover your premium payments. You can also take out a loan against the policy or make a full or partial withdrawal of your cash value. Depending on your policy, a cash withdrawal could significantly reduce your death benefit. A loan won't reduce your death benefit, though, as long as you pay it back with interest.

How much you can borrow depends on your accrued cash value amount. Call your life insurance company to find out.

The upside of taking out a loan against your policy is you get an interest rate that's generally lower than a bank loan, and you're not obligated to pay it back. However, the money you owe, plus interest, will be deducted from your death benefit when you die, so your beneficiaries will lose some of the payout if you don't repay the loan.

Learn more about cash value in life insurance: What's it worth to you?

Last updated: Oct. 6, 2010
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