- Speak to a licensed sales agent!
- (800) 521-7873
How Much Can You Borrow Against Your Life Insurance Policy?
How much can you borrow against your life insurance policy? In most cases, you can borrow up to 90% of your policy’s cash value. We’ll explain what cash value is, which types of policies have it, and go over the options you have for pulling money out of that cash value.
How Cash Value Works
First things first – you need to have a cash value policy in order to have something to borrow against. Policies that build cash value are the ones that last for your entire life. Here’s a cheat sheet:
- Whole life: yes, has cash value; interest rate is guaranteed for the life of the policy and locked in at time of purchase
- Universal life: yes, has cash value; interest rate varies over time and will be changed by insurer periodically
- Variable life: yes, has cash value; account grows based on investment decisions, but you may also have access to a low, flat rate of interest set by your insurer; possibility to lose cash value if your investments lose value
- Indexed universal life: yes, has cash value; interest rate is based on the performance of a market index (like the S&P 500), so you can earn more in a good market but may earn little or nothing in a bad market; no possibility to lose cash value since you’re not actually invested in the market
- Term life: no, has zero cash value – but may be convertible to a cash value policy
If you have a cash value policy, it will grow over time. The longer you’ve had your policy, the more cash value you’ll have access to. Every payment you make gets divided up: the insurer will take out the cost of your coverage plus any administrative fees, and deposit the rest in your cash value account. You also have the opportunity to earn interest on that cash.
Depending on your policy type, that may be a flat, guaranteed rate (whole life) or a variable amount that depends on the performance of a market index (indexed universal life). No matter how your account earns interest, it does so on a tax-deferred basis. That means you don’t pay any tax, which helps that money grow and compound faster.
The best part about cash value? You have access to it, making it a great financial backup for investments, unexpected expenses, or anything you like. How much can you borrow against your life insurance policy? As we mentioned above, most insurers will let you borrow up to 90% of your current cash value.
Want to talk to a real person about cash value life insurance? Call us at (800) 521-7873 and we’ll answer all your questions! Or click the button below to start with a free term life quote.
How to Access Your Cash Value
There are multiple ways to access your cash value:
- Policy loan. This is the option that lets you borrow against your life insurance policy through a policy loan. This is a private loan with your insurer, so it won’t ever hit your credit report. You can simply request the loan and your insurer will provide the funds. Policy loans do accrue interest, but this will be at least partially offset by the interest your cash value continues to earn. Although this is called a loan, technically you don’t have to pay it back. If you do not pay it back, you’ll keep accruing interest charges, and the total you owe will be deducted from the policy’s death benefit before it goes to your loved ones.
- Partial withdrawal. You can also withdraw money from your account. Since it’s not a loan, you won’t owe interest on this withdrawal. It will, however, come with a fee – and you’ll have less cash value present in your account to earn interest.
- Full surrender value. If you ever decide you don’t need your policy anymore, you can cancel it with your insurer and claim the total amount of your cash value, minus any surrender fees. Remember that if you do this, you’ll no longer have coverage and there will be no death benefit for your loved ones to claim.
- Premium payments. Many insurers will offer an option that lets you use your cash value to pay your premiums. One caveat? It will be up to you to make sure you always have enough in your account to cover your next payment and maintain any required minimum your insurer has in place.
So how much can you borrow against your life insurance policy? Let’s say your insurer lets you borrow against 90% of your total cash value.
- If you have $10,000 available, you could borrow against as much as $9,000.
- If you have $50,000 available, you could borrow against as much as $45,000.
- If you have $75,000 available, you could borrow against as much as $67,500.
Want to talk to a real person about cash value life insurance? Call us at (800) 521-7873 and we’ll answer all your questions! Or click the button below to start with a free term life quote.
Cash Value Strategies & Considerations
Borrowing against your cash value is a convenient way to get cash when you need it. Here’s the main strategy idea behind that method of raising cash, as well as consideration to keep in mind.
- Strategy: Be your own banker. You may see videos and websites that tell you to use whole life insurance to become your own banker. What they’re talking about is the ability to borrow against your policy. The benefits? Borrowing the money means your cash continues to earn interest. You’re not removing the cash from your account, so it can continue to grow and compound while you use the borrowed money to participate in an investment opportunity. If you’re a savvy investor, the borrowed money will generate a large return on investment, allowing you to pay that loan back. When your next opportunity arises, you can request another loan. In this way, you’re using the insurer’s money to finance your opportunities rather than risking your own.
- Strategy: Overfund your account. Another financial strategy you’ll see referenced online and in finance books is overfunding your account. Overfunding happens when you pay more than the required amount to grow your cash value faster. However, you absolutely should not do this within the policy’s first seven years or you’ll trigger an IRS reclassification, removing the tax-deferred status of your policy. If you’re interested in this strategy, make sure you involve your tax professional to get the most up-to-date advice for maximizing the tax benefits of your policy.
- Consideration: Potentially decreased death benefit. If you don’t pay back your loan, that money will be taken out of the death benefit when your loved ones file a claim after your death. Keep in mind the reason why you bought your policy: to leave your loved ones a last financial gift. It’s up to you to balance their future needs with any money you borrow.
How much can you borrow against your life insurance policy? That’s going to depend on multiple things: the way your policy earns interest, your policy’s face value (which determines how much you pay per month), the cost of your coverage, and whether you’ve passed the 7-year period where you cannot overfund your account. If you’re shopping now, it’s a good idea to tell your agent you’re looking for and what your risk tolerance is. Our agents can help you find the right cash value policy that meets your needs and protects your loved ones’ financial futures.
Call us at (800) 521-7873 and we’ll answer all your questions about borrowing against your policy! Or click the button below to start with a free term life quote.
This material was not intended or written to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code. Always consult with your independent advisors regarding your particular financial and legal situation. The material here is presented for informational purposes only and should not be construed as tax or legal advice. Consult all policy documentation or your agent for details.
