What Is a Whole Life Insurance Loan?

A whole life insurance loan is advanced to policyholders who borrow against the policy’s accrued cash value. Borrowers receive the money tax-free and can spend it on anything. They can repay the loan or have it deducted from the death benefit.

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    Christian Simmons

    Christian Simmons

    Financial Writer and Certified Educator in Personal Finance

    Christian Simmons is a financial writer who has worked professionally as a journalist since 2016. As an active member of the Association for Financial Counseling & Planning (AFCPE), Christian prides himself on his ability to break down complex financial topics in ways that Annuity.org readers can easily understand.

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    Michael Santiago

    Senior Financial Editor

    Michael Santiago is a skilled writer and editor with over a decade of experience in various industries. As a senior financial editor, he collaborates with a team of experts to develop compelling and accurate content.

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    Daniel J. Adams, MBA, CFP®, CLU®
    Daniel J Adams, Annuity.org reviewer

    Daniel J. Adams, MBA, CFP®, CLU®

    Founder and President of CEG Life Insurance Services

    As the founder of CEG Life Insurance Services, Daniel J. Adams has extensive experience with life and health insurance products. Daniel assists clients in building a secure financial future as a Certified Financial Planner™ professional and independent insurance agent. He also trains new agents and advises other financial professionals.

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  • Updated: July 17, 2023
  • 5 min read time
  • This page features 6 Cited Research Articles

Key Takeaways

  • You can borrow against the cash value of your whole life insurance policy. 
  • The money you receive from a whole life policy loan is tax-free, but the loan will generate interest you must pay.
  • Borrowing against your life insurance policy solves the issue of getting money with no restrictions at a low interest rate.
  • Paying back a whole life insurance loan is optional but failing to repay it reduces the death benefit and hampers the policy performance. 

What Is a Whole Life Insurance Loan?

Unlike a term life insurance policy, a whole life policy accrues cash value and earns interest as time progresses. As a policyholder, you can use the cash value to borrow against it. This feature also distinguishes it from a life insurance settlement.

You can typically only borrow a set percentage of the total cash value and no more.

With the cash value acting as collateral, you can repay the loan. If not, the repayment comes from the death benefit after you pass away. It will mean less money for your beneficiaries. In either case, repayment will include interest payments from the loan.

 Policy loans from a whole life insurance policy can be an excellent option to consider for emergency savings, large capital needs (such as down payments) and supplemental retirement income.

How Whole Life Insurance Loans Work

Whole life insurance policies differ from term life policies because they have a cash value component. When you make premium payments, a fraction of the amount is allocated towards investments, which accrue tax-deferred growth over time at a guaranteed minimum rate. The money is yours, and you can access it in a few ways, including a policy loan.

To get a whole life insurance loan, you must let your cash value accumulate. Generally, it takes a minimum of 10 years or more for the cash value to equal or exceed the total amount of premiums paid.

The accrued cash value serves as your loan collateral, but you can generally only borrow a set percentage of that value. Your insurance company determines the exact percentage.

A whole life insurance loan doesn’t come with a set amortization (payoff) schedule. However, financial advisors usually recommend having a set plan on how to repay the loan to keep your death benefits in place.

The Internal Revenue Service doesn’t recognize this loan as income, so the money comes to you tax free if the policy is active. Moreover, a credit check may not be required if you opt to borrow funds from the cash value of your whole life insurance policy.

When Can You Borrow From Your Policy?

Whole life insurance policyholders can typically borrow from the policy once it has accumulated enough cash value. The exact cash value you need to accumulate to borrow depends on factors such as the size of your premiums, how long you’ve had the policy, the performance of the insurer’s investments and the provider’s guidelines on loans. 

Insurers set the amount you can borrow as a percentage of the accumulated cash value. The exact percentage can differ by insurance company. Providers may also set minimum and maximum loan amounts. 

When you take out a policy loan, you’re reducing the money available to you in the future. And if you die before repaying the loan, the insurer will deduct the loan balance and accumulated interest from your death benefit. 

This kind of loan is a big financial decision. Consider the long-term implications for you and your loved ones. Consult your insurance company or a qualified financial advisor to help with your decision.

Repayment

Repaying a whole life insurance loan offers significant flexibility. Unlike traditional loans, there is no fixed amortization schedule. You have the option to repay the loan at your discretion. It’s important to note that the loan carries interest payments, and repaying it improves your policy’s long-term performance.

If you choose not to repay the loan, the outstanding balance will be deducted from your policy’s cash value. Failure to repay the loan can also have serious consequences. In addition to reducing the death benefit and potentially increasing premiums, if the cash value reduces to the point that it can no longer cover the policy’s cost, the policy may be terminated, leaving an outstanding loan balance subject to taxation.

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Is a Whole Life Insurance Loan a Good Idea?

A whole life insurance loan is a valuable tool. But whether it’s a good idea depends on one’s financial situation and goals. Weigh the pros and cons before deciding. Assess differences in interest rates and repayment terms. Look at the insurance company’s past investment performance and financial stability.

Pros and Cons of Whole Life Insurance Loans

Pros

  • Easy access to money that can be used without restriction
  • Lower interest rates than traditional loans
  • Repayment flexibility 
  • Loan not subject to taxes
  • Requires no credit check and has no impact on credit rating
  • Shorter underwriting process

Cons

  • Reduces the growth of the policy 
  • Reduces the death benefit in case of non-repayment
  • Carries a risk of policy lapse
  • Policy termination results in the outstanding loan balance becoming taxable
  • Borrowers can face fees and interest charges associated with the loan

When Does a Whole Life Insurance Loan Make Sense?

As already noted, a whole life insurance loan can be a valuable tool. It can be a convenient source of funding for various needs and expenses. As with any tool, you need to know when to use it. Below are some scenarios when taking out a whole life insurance loan makes sense.

Why Should You Consider a Whole Life Insurance Loan?

  • When you need access to cash
  • When you want to avoid taxes 
  • When you have a low credit score 
  • When you have a temporary need 
  • When you need low interest financing 
  • When you need flexibility in loan repayment
  • When you don’t intend to pass a death benefit

FAQs About Whole Life Insurance Loans

How much can I borrow with a whole life insurance loan?

The amount you can borrow with a whole insurance loan depends on your policy’s cash value and the insurance company’s guidelines.  

Can I use the loan for any purpose? 

Yes, you can use your whole-life insurance loan for any purpose. There are no restrictions on the money.

How does taking out a loan affect the policy’s performance?

Taking out a loan reduces your policy’s cash value and limits its ability to generate returns and provide more benefits. Accrued interest also raises premium costs.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: July 17, 2023