Life insurance policies provided by employers are usually term life insurance policies with no cash value, as explained by Prudential. However, other types of life insurance policies, such as universal insurance, have cash value components that can be borrowed against. Indexed universal insurance is tied to the U.S. stock market, while variable universal insurance allows policyholders to manage investment options.

Policy Type	Cash Value	Additional Information
Term Life Insurance	No cash value	Offered as an employee benefit; benefits may only equal a year or two of salary
Universal Life Insurance	Cash value separate from death benefit	Permanent coverage as long as premiums are paid on time; cash value can be borrowed against, surrendered for its current value, or used to make premium payments

Group term life insurance policies are typically offered to members of specific groups, such as employees of a company or members of a labor union or association. If you leave your job, the policy will generally end about 30 days afterward. However, some policies may be portable, allowing you to change the policy into an individual one, although this option is not common. If the insurance provider wants to keep you as a customer, they may offer a deal if you decide to continue with the policy.

While you cannot borrow from a term life insurance policy offered by an employer, you may be able to borrow against the cash value of a universal life insurance policy. This can be done by surrendering the policy for its current cash value or borrowing against the cash value with interest. Remember that borrowing against the policy reduces its death benefit and can have tax consequences, so it is important to consider all options carefully before making a decision.

Life insurance policies that have a cash value account can be borrowed from while the insured is still alive. Permanent life insurance policies, such as whole life and universal life, build cash value that can be borrowed against. Here are some important things to consider when borrowing from life insurance:

Important Facts
The most you can borrow against your life insurance is up to 90% of its cash value.
It can take several years for enough cash value to build up to take a loan in the amount needed.
Term life insurance policies do not have a cash value component and therefore cannot be borrowed against.
Interest rates on policy loans are typically lower than bank loans or credit cards.
A policy loan reduces the available cash value and death benefit, and if unpaid, interest is added to the balance and accrues, putting the loan at risk of exceeding the policy’s cash value and causing the policy to lapse.
The loan is not recognized by the IRS as income and remains free from tax as long as the policy stays active (provided it’s not a modified endowment contract).
If the loan is not paid back before the insured person’s death, the loan amount plus any interest owed is subtracted from the amount the beneficiaries are set to receive from the death benefit.

Policy loans do not affect credit, and there is no approval process or credit check since the borrower is essentially borrowing from themselves. The loan can be used for anything from bills to vacation expenses to a financial emergency. However, it’s important to pay the loan back in a timely manner, on top of regular premium payments, to avoid risking the policy lapsing and becoming taxable. Be sure to thoroughly consider the pros and cons of life insurance policy loans in the context of your situation before taking one out.

Sources: Investopedia / Michela Buttignol, Strategy, Northwestern Mutual, Internal Revenue Service

If you’re applying for a loan and your lender requires collateral, you may be able to use your life insurance policy as collateral. Here’s how to use term life insurance as collateral:

Step	Action
Step 1	Check with your lender if they accept the collateral assignment of an existing life insurance policy or if they require a new life insurance policy for collateral assignment.
Step 2	If a new policy is required, shop around for a life insurance policy with a death benefit amount sufficient as loan collateral.
Step 3	Apply for a new life insurance policy with the insurer and confirm with your lender that the policy meets their loan requirements.
Step 4	Complete a collateral assignment form via your insurer and provide your lender’s contact information. The form requires signatures from both the assignor and assignee.
Step 5	Proceed with your loan application once your bank confirms they’re the collateral assignee for your life insurance policy.

It’s important to note that the total death benefit available to your beneficiaries will depend on whether you pay off your loan before passing away. If you pay off the loan, your beneficiaries can file a claim for the policy’s full death benefit. However, if you pass away before paying off the loan, the total death benefit available will be reduced by the amount needed to fully pay back your lender. Your lender will be an assignee rather than a beneficiary, and the assignee can only claim up to the amount required to settle your loan. Any amount remaining may be claimed by your beneficiaries.

Collateral assignment may not be the only way to qualify for the loan you need. If you have a whole life or universal life policy, you may be able to borrow from your policy’s cash value instead of borrowing from a lender.

Consult with a financial advisor to understand the implications of your particular situation.

Life insurance policies can provide a great source of money to help purchase a home. There are three ways to borrow money from a life insurance policy, which includes a loan, a partial surrender, and a full surrender.

Loan

A loan is a great option if you still want life insurance coverage. The loan has interest due, which accrues over time, and it will probably reduce your dividend payment. However, there is no term limit on the loan as long as you make the required premium and interest payments. Your death benefit will be reduced by the amount of the loan, so it’s essential to repay the loan as soon as possible.

Partial Surrender

You can make a withdrawal, which is equivalent to partially surrendering your policy. The cash value of your policy will be reduced, as will your death benefit. You will need to leave some cash in your policy, but it is usually a relatively small percentage of the total cash.

Full Surrender

If you do not need to keep the life insurance policy in force, you can surrender your policy in full. You will be able to get the total cash value in the policy, minus any surrender charges if applicable.

It’s essential to consult with your agent to understand if you are subject to any surrender charges or other additional fees or penalties. Additionally, you should consider the tax implications of each option.

If you want to use a life insurance policy to save money, consider a whole life policy. The cash value of your policy will increase, and your policy will begin to pay out dividend payments. This could help you save more or increase your dividend in subsequent years.

It’s crucial to work with your agent to structure a whole life policy that meets your specific needs. You should also consider how long you need to hold the policy before making withdrawals.

In conclusion, borrowing money from a life insurance policy is possible, and it can be a great source of funds for a down payment on a house or any other purpose. However, it’s essential to consider all the options and consult with your agent to ensure you make the right decision for your specific situation.

Pros	Cons
Money can be used for any purpose, including buying a home	Your death benefit will be reduced by the amount of the loan
No term limit on the loan as long as you make the required premium and interest payments	The loan has interest due, which accrues over time
A withdrawal can be made if you do not intend to pay back the amount of money	The cash value of your policy will be reduced, as will your death benefit
The total cash value in the policy can be obtained through a full surrender	You may be subject to surrender charges or other additional fees or penalties
Whole life policies can help you save money and accrue a cash value	You need to hold the policy long enough for it to make sense
Life insurance policies can provide a great source of money to help purchase a home	It’s essential to consider all the options and consult with your agent to ensure you make the right decision

Permanent life insurance policies, such as whole life and universal life insurance, have a cash value account that builds up over time. This cash value can be used to borrow money from the policy, which can be used for any purpose. However, there are a few important things to keep in mind when considering borrowing against your life insurance policy.

Key Points
The maximum amount you can borrow is typically up to 90% of the policy’s cash value
You can only borrow against a permanent life insurance policy with a cash value account, not a term life insurance policy
If you don’t pay back the loan with interest, it can reduce the policy’s cash value and death benefit, and may cause the policy to lapse
If you pass away while owing money on a life insurance loan, the loan amount plus any interest owed will be subtracted from the death benefit your beneficiaries receive

It’s important to understand the specific rules and guidelines for borrowing against your life insurance policy, as they can vary by insurance company and policy type. However, in general, you can borrow up to 90% of the policy’s cash value with a permanent life insurance policy, as long as there is enough cash value built up to cover the loan amount. It’s also important to note that borrowing against your policy will reduce the amount of cash value and death benefit available to you, and that interest will accrue on the loan.

If you’re considering borrowing against your life insurance policy, it’s important to carefully weigh the pros and cons and ensure that you can pay back the loan with interest in a timely manner. If you’re unsure about whether borrowing against your policy is the right choice for your financial situation, consider consulting with a financial advisor or insurance agent.

If you have a cash value life insurance policy, such as universal or whole life insurance, you may be able to borrow against it once the cash value reaches a certain threshold. However, it may take several years for your policy to accumulate enough value for a policy loan or withdrawal. In this article, we’ll discuss what you need to know about borrowing against your life insurance policy.

Table of Contents

Cash Value Life Insurance	Policy Loans	Advantages of Policy Loans
Disadvantages of Policy Loans	Applying for a Policy Loan	Repayment
Limitations	Conclusion

Cash Value Life Insurance

To borrow against your life insurance policy, you must have cash value life insurance, such as universal or whole life insurance. These policies build a cash value over time, which operates as a tax-deferred savings or investment account. Not all life insurance policies have a cash value to borrow against, which is one of the main differences between term and permanent life insurance.

If you have a convertible term life insurance policy, you can upgrade to whole or universal life insurance without undergoing a new health exam.

Policy Loans

Policy loans allow you to borrow money from the insurance company using your policy’s death benefit and cash value as collateral. You cannot borrow against term life insurance, but you may be able to convert your term policy to a permanent one, which would open the door to borrowing money in the future.

The minimum cash value required for a policy loan varies by insurer. You can check your policy documents or ask your insurance agent for specific details. The approval process typically involves submitting a simple form and verifying your identity.

Advantages of Policy Loans

Policy loans have fewer credit and tax implications than other loan types. The IRS does not recognize policy loans as income, making them a tax-free funding source. You can use the money however you like, and you will not be tied to a strict repayment schedule. The loan will not affect your credit score, nor will your credit score affect the loan’s interest rate. You can obtain a policy loan without undergoing employment verification or a credit check. Policy loans also tend to have relatively low interest rates.

Disadvantages of Policy Loans

During the repayment period, your coverage amount drops. If you die before repaying the loan, your loved ones will not receive the full death benefit of your policy. Failure to repay the loan could also have other consequences. As interest accumulates, it will be added to your loan balance. Eventually, the outstanding balance could exceed the cash value of your policy, causing a lapse that leaves you without insurance coverage. If your policy lapses during the repayment period, you could end up owing income tax on the amount borrowed.

Applying for a Policy Loan

You can apply for a policy loan online or by filling out a paper form. The insurance company will likely require you to confirm your identity, but you do not need to undergo a credit check or any type of income or employment verification. The process is typically quick and relatively informal.

Repayment

Policy loans do not have a fixed repayment schedule. It’s important to keep up with your premium payments and at least make regular interest payments to avoid owing income tax on the amount borrowed.

Limitations

You can only borrow against your policy if you have a permanent policy with a cash value component, such as whole or universal life insurance. Term life policies do not qualify, as they do not have a cash value. How much money you can borrow from your life insurance policy depends on the cash value of your policy and the limit set by your insurer.

Conclusion

Borrowing against a life insurance policy could be a better option than using a credit card or applying for a personal loan to cover a large expense. However, it’s important to fully understand the terms of your policy and the tax implications before making a decision. We recommend that you discuss your needs and goals with a financial advisor or estate planning attorney.