How much can I borrow from my life insurance policy?
The limit for borrowing money from life insurance is set by the insurer, and it's typically no more than 90% of the policy's cash value. When your policy has enough cash value (minimums vary by insurer), you can use it as collateral to request a loan from your insurance company.
It often takes five to 10 years to accumulate enough cash value to borrow against your life insurance policy. The exact length of time depends on the structure of your policy, including your premiums and rate of return.
The amount you can borrow depends on the cash value of the policy. Typically, the insurer will let you borrow up to 90% of the cash value. However, in some cases, they might allow you to borrow up to 100% of the cash value. Check your policy and talk with your life insurance agent to determine how much you can borrow.
The $10,000 refers to the face value of the policy, otherwise known as the death benefit, and does not represent the cash value of life insurance policy. A $10,000 term life insurance policy has no cash value.
Examples of Cash Value Life Insurance
An example is a cash value life insurance policy with a $25,000 death benefit. Assuming you don't take out a loan or withdraw, the cash value accumulates to $5,000. After the policyholder's death, the insurance company would pay out the full death benefit, which would be $25,000.
You do not need to repay your life insurance loan, but there are risks associated with failing to do so. If you don't repay the loan before you die, the remaining balance will be deducted from the death benefit.
How fast does cash value build in life insurance? Most permanent life insurance policies begin to accrue cash value in 2 to 5 years. However, it can take decades to see significant cash value accumulation. Consult a licensed insurance agent to understand the policy's cash value projections before applying.
If you repay all or a portion of the loan, options include periodic payments of principal with annual payments of interest, paying annual interest only, or deducting interest from the cash value. “Loans have an interest rate like any other type of loan," says Reich.
Permanent life insurance, such as universal and whole life policies, comes with a death benefit and a cash value account that you may can cash out while you're still living.
| Age | Term length | Average monthly rate |
|---|---|---|
| 40 | Term length10 years | Average monthly rate$47.41 |
| 40 | Term length15 years | Average monthly rate$61.33 |
| 40 | Term length30 years | Average monthly rate$137.89 |
| 50 | Term length10 years | Average monthly rate$112.67 |
Which life insurance can you borrow from?
Life insurance loans are only available on permanent life insurance policies — such as whole life and universal life — that have a cash value component. You likely can't borrow against a term life insurance policy since it probably doesn't have cash value. Learn more about term vs. whole life insurance.
You could potentially take a loan from your policy, withdraw the cash value it's accrued over time, use a living benefit rider or sell your policy. A financial advisor can help you integrate a life insurance policy into your financial plan. Find an advisor today.
If you withdraw up to the amount of the total premiums paid into the policy, the transaction is not taxable as it is considered a return of premiums. If, however, you then withdraw any gains on the policy (like dividends), then these amounts could be taxed as ordinary income.
At the low end of a life settlement, you can expect to receive around 10% of the policy's face value. That means for the $150,000 average policy we mentioned earlier, you would receive around $15,000 in a lump sum of cash after a life settlement.
Single premium whole or universal life insurance policies are the types that generate immediate cash value. However, you can also secure immediate life insurance coverage with a no exam term or whole life insurance policy.
Universal life insurance is also referred to as "flexible premium adjustable life insurance." It features a savings element (cash value) that grows on a tax-deferred basis. The insurer invests a portion of your premiums.
Although the rates may be favorable, you still pay interest on life insurance loans. And because the interest is often subtracted from the cash value, it can sneak up on you. If your loan plus interest exceeds your policy's cash value, the policy could lapse.
You can only borrow against a whole life insurance policy or a universal life insurance policy. Policy loans reduce the death benefit if not paid off. Life insurance companies add interest to the loan balance, which if unpaid can cause the policy to lapse. Only permanent life insurance builds cash value.
Keep in mind, the insurance company will charge interest on the policy loan. If you borrow money from your life insurance policy, you are borrowing your own money. It is essentially an advance of money that could be received from the policy either through a surrender of the policy or the payment of the death benefit.
How much can you sell a $100,000 life insurance policy for? On average, you can expect to receive 20% of the policy's face value when you sell it, according to the Life Insurance Settlement Association (LISA). That means a $100,000 life insurance policy might sell for $20,000.
What happens when a life insurance policy is paid in full?
Once the policy is paid-up, it's guaranteed to remain in effect for the rest of the insured's life. The life insurance company will evaluate the policy's current cash value and calculate the death benefit amount supported by that current cash value amount.
Unlike term insurance, whole life policies don't expire. The policy will stay in effect until you pass or until it is cancelled. Over time, the premiums you pay into the policy start to generate cash value, which can be used under certain conditions.
- Cash Value Accumulation. Life insurance policies, such as Farm Bureau Insurance's whole life policy, often come with a cash value component. ...
- Tax Advantages. ...
- Estate Planning. ...
- Business Succession Planning. ...
- Charitable Giving.
Life insurance collateral loans typically have lower interest rates than you would get with a personal loan or credit card. While rates vary, they typically fall within the range of 6% to 8%, depending on the insurance company and your policy. Your cash value continues to earn interest during the loan.
Third, if the loan plus interest grows to exceed the value of your cash value, your policy could lapse and you would lose your life insurance protection. Weigh these consequences before borrowing.
