Ever wondered if your life insurance policy can do more than just provide a payout after you’re gone? Guess what—it can! In certain cases, you can actually borrow from your life insurance policy while you’re still alive. It may sound surprising, but it’s true, and it could be an incredibly smart financial move. Let’s explore how this works and why it might make sense for you.
What Does It Mean to Borrow from Your Life Insurance Policy?
Not all life insurance policies allow you to borrow money. This perk only comes with permanent life insurance—like whole life or universal life insurance. These policies build up a cash value over time, kind of like a savings account wrapped into your insurance plan.
Once that cash value grows enough, you can take out a loan against it. You don’t need to go through a credit check or loan approval process. It’s your money, after all.
Here’s how it works:
- You pay premiums over time.
- A portion of those payments builds up a cash value.
- Once the cash value has accumulated, you can borrow from it.
Simple, right? Now let’s get into the smart reasons why people decide to do this.
Reason #1: You Don’t Need a Credit Check
If you’ve ever applied for a personal loan or credit card, you know how painful the approval process can be. Tons of paperwork, credit score requirements, and waiting. But when borrowing from your life insurance policy, you skip all of that. There’s no credit check because you’re borrowing against your own money.
This can be a lifesaver if your credit isn’t in great shape, but you need access to cash quickly—whether it’s for unexpected medical bills, emergency home repairs, or just filling a financial gap.
Reason #2: Lower Interest Rates
Let’s talk about interest. Nobody likes it, but it’s a part of borrowing money. The good news? Loans against your life insurance policy usually come with much lower interest rates than traditional bank loans or credit cards. We’re talking as low as 5-8%, depending on your insurer and policy terms.
Compare that to the average credit card interest rate, which can hover around 20%, and suddenly this option starts to look a lot more appealing.
Reason #3: Flexible Payback Options
What if you’re running tight on cash one month? With most loans, you’re stuck making fixed monthly payments, like it or not. If you miss a payment, it can hurt your credit score and rack up fees.
But when you borrow from your life insurance policy, there’s no set payment schedule. You can:
- Repay it all at once later
- Make small payments when it’s convenient
- Or even choose not to repay it at all—just keep in mind, it’ll reduce your death benefit
It’s that kind of flexibility that makes this an attractive option for people going through uncertain financial times.
Reason #4: Use It However You Want
This isn’t a student loan or a mortgage where you have to prove how you’re using the funds. When you take a loan from your policy, there are no questions asked. Use the money however you wish:
- Start a side business
- Pay for college tuition
- Cover medical expenses
- Take a dream vacation (hey, why not?)
You earned the cash value through your premiums, so you decide how you want to spend it. It’s a bit like tapping into your own private line of credit.
Reason #5: No Tax Hit – Usually
Here’s something people love: tax-free money. In most situations, the money you borrow from your life insurance policy is not considered taxable income, so you won’t get hit with a surprise bill from the IRS.
But, there’s a caveat. If you don’t pay back the loan and it causes your policy to lapse, the remaining loan amount might become taxable. So, while you have flexibility, it’s smart to keep an eye on your policy status and loan balance.
Things to Watch Out For
Sure, borrowing from your life insurance policy has some big benefits—but it’s not completely risk-free. Here are a few things to keep in mind:
- Reduced death benefit: If you don’t repay the loan, your loved ones will get less from the policy.
- Policy lapse: If the interest builds up too much and exceeds your cash value, the policy could lapse.
- No compound growth: Any amount you borrow no longer earns interest as part of your cash value.
Have a conversation with your insurance provider or a financial advisor to make sure borrowing is the right move for you. It’s not a one-size-fits-all solution.
Real-Life Example: Meet Lisa
Lisa, a 45-year-old single mom, had been paying into her whole life policy for over 15 years. When her daughter was accepted to college, Lisa didn’t want her to start life with student loan debt. Instead of getting a high-interest parent loan, she borrowed from her life insurance policy. The loan covered tuition and allowed Lisa to keep her savings intact. She plans to repay the loan slowly over time, on her own terms.
For Lisa, it was peace of mind without the pressure—and that’s worth a lot.
Wrapping It All Up
If you have a permanent life insurance policy, borrowing against it can be a smart and flexible way to access money when you really need it. Just remember:
- No credit check needed
- Lower interest rates
- Flexible repayment
- No restrictions on use
- Usually tax-free
But as with any financial move, think it through. If you’re unsure, talk to a financial advisor who can walk you through the pros and cons.
Want to know more or explore other life insurance options? Check out our article on the differences between term and whole life insurance to see which policy fits your life stage best.
Need a deeper dive into this topic? Head over to the original article on Bankrate for more detailed insights.
Your life insurance is more than just a safety net—it could be a powerful financial tool. Use it wisely, and it might just come to your rescue when you least expect it.