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Personal Loan Against Life Insurance: Complete Guide

Personal Loan Against Life Insurance Policy
Jason Steele
Jason SteeleUpdated February 27, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you have an emergency or major expense and you need cash to cover it, you may be able to borrow against your life insurance policy. As long as you’ve had your policy long enough, a life insurance loan may be easy to get. However, taking out a personal loan against your life insurance policy has drawbacks, especially if you’re unable to repay the loan.Before you take out a personal loan against a life insurance policy, read on to learn all about the pros and cons involved.

How Does a Personal Loan Against Life Insurance Work?

You can only take out a personal loan against certain types of life insurance policies, namely permanent life insurance policies. These include whole life insurance, universal or adjustable life insurance, variable life insurance, and variable universal life insurance. You can’t take out life insurance loans against term life insurance.The way permanent life insurance policies work is that part of the premium you pay for the policy goes to the death benefit the beneficiary receives if the policy holder dies. Another portion of the premium goes to a cash value account. Life insurance loans use the cash value as collateral. You can take out a personal loan against a life insurance policy when you’ve built up sufficient cash value in your policy, a process that may take years. There is typically a threshold cash value amount you need to reach before you can borrow against it. And if you don’t repay the loan, the amount you owe could be deducted from the death benefit your beneficiary receives. Recommended: 10 Possible Benefits of Obtaining Personal Loans 

How Soon Can You Take a Personal Loan Against Your Life Insurance?

Because you need to have a certain amount of cash value in your policy in order to take out a life insurance loan, it may be a decade before you can get a loan this way. The reason: When you get a loan against a life insurance policy, you are borrowing against the funds that have built up over time from your premium payments. Typically, how quickly that money accumulates is based on a variety of factors, including what kind of policy you have. With many cash value policies, there often won’t be enough money in the account to borrow from for about 10 years. 

How Much Can You Borrow Against a Life Insurance Policy?

How much you can borrow against a life insurance policy varies, as does how much personal loan can you get. Usually, you can borrow about 90% of the cash value of the life insurance policy. When you borrow against your life insurance, the insurer gives you a loan that uses the cash value of your policy as collateral. The cash value of the policy stays the same and continues to accumulate investment income. However, the death benefit is reduced by the amount of money you borrowed, plus interest on the loan. You don’t have to pay back the loan within a specific time frame — or ever. If, when, and how you repay the funds is up to you. But paying it back can be beneficial because it restores the full death benefit for your beneficiary. Also, unless you pay the annual interest on the loan, your insurer will add the interest to your loan amount.

How Can You Monitor a Personal Loan Against a Life Insurance Policy?

Before taking out a personal loan against a life insurance policy, you will need to first contact your life insurance company. You should request something called an in-force policy illustration that will spell out the policy’s value if you take out a loan and how the interest will be charged. After taking out a personal loan against your life insurance policy, be sure to carefully monitor the policy’s cash value and the loan amount. If your outstanding loan balance becomes larger than the size of your policy’s cash value, the policy will lapse. Not only will you then lose coverage, but you’ll also have to pay a higher tax bill if the outstanding loan amount is larger than the amount that you’ve paid in premiums. To help prevent this, you should pay your insurance premiums and also make interest payments on the loan whenever you can. Recommended: What Are the Pros and Cons of Personal Loans?

What Is the Repayment Policy for a Personal Loan Against Your Life Insurance?

Technically, you don’t ever have to repay a personal loan against your life insurance policy. There are generally no rules about repayment. However, there may be significant repercussions to not repaying the loan. For instance, if you don’t repay the loan before you die, the insurance company will reduce the death benefit to your beneficiary. And if the policy lapses because the cash value is lower than the loan amount, you could end up with a tax bill, as discussed.As you can see, repaying the loan can make sense. If you pay it back, you have a few different repayment options. There are no set repayment terms like with many other loan types. You can choose to pay only the annual interest, you can repay the principal plus an annual payment of interest, or you can deduct the interest from the cash value of the policy. It’s up to you; there is no formal repayment plan as there is with many other types of loans. Recommended: What to Know About Loan Protection Insurance Before Purchasing a Policy

Pros and Cons of a Personal Loan Against a Life Insurance Policy

Before taking a personal loan against a life insurance policy, it’s wise to consider the potential benefits and drawbacks.Pros
  • No hard credit check or lender qualifications to meet
  • Interest rates are typically low
  • No strict terms on repayment
  • No penalties, fees, or negative impacts to your credit if you miss a payment
  • The cash value of your policy usually continues to accumulate income. 
Cons 
  • You risk losing your life insurance policy if you don’t repay the loan.
  • There may be potential tax penalties for not repaying the loan.
  • The total outstanding balance will be deducted from the death benefit, so your beneficiaries could receive less or nothing when you pass away.
  • You can’t borrow against your life insurance policy until you have enough money in it, which usually takes many years. 
Recommended: Life Insurance vs Savings Account

Personal Loan Against Life Insurance vs Personal Loan From a Private Lender

You can take out a personal loan from a private lender rather than taking out a personal loan against life insurance. Here are some details about each process to help you decide which option may be best for you.What is a private lender? Private lenders are individuals, professional investors, or financial (nonbank) institutions that provide loans. Unlike banks or credit unions, private lenders offer financial products without taking deposits from customers. You can get a personal loan from a private lender in person or online. If you’re wondering, how do personal loans work?, the process is fairly simple. You apply for a loan, the lender checks your credit, and if you’re approved, they give you the funds in a lump sum that you repay in regular installments with interest. Personal loans are flexible and can be used for almost any purpose.By comparison, personal loans against life insurance policies don’t require a hard credit check, nor do they come with formal repayment terms. There are no penalties or fees for missing a payment like there are with personal loans from private lenders. However, a personal loan against a life insurance policy may reduce or even eliminate the death benefit your beneficiary receives unless you repay what you borrowed. And if your policy lapses, you may owe taxes on it. Plus, you have to wait until the cash value on your policy has built up enough funds to borrow from in the first place, which will take about a decade. In contrast, you can take out a personal loan anytime.

Personal Loan Requirements

The typical personal loan requirements of private lenders are quite different from the requirements of a personal loan against a life insurance policy. Most private lenders base their decision of whether or not to approve you for a personal loan on your credit score, debt-to-income ratio, and proof of income and employment. Some personal loans are secured and require collateral, which could be your car, fine art, or jewelry. Personal loans against a life insurance policy are generally easier to obtain. There are usually no qualifiers or approval process whatsoever. However, you have to have a life insurance policy with enough cash value to borrow against, and that can take 10 years or more.Here are two additional factors to consider when deciding your best recourse for a personal loan:

Annual Premiums

While there is no annual premium on a personal loan from a private lender, there are certain fees you might have to pay. Some lenders charge late fees for overdue payments, prepayment penalties for repaying a loan early, or origination fees to cover the cost of processing your loan. Personal loans against life insurance policies generally don’t charge fees. However, there are annual premiums you need to pay on your policy, though the amount varies depending on your specific situation. The premiums for permanent life insurance policies (the type you can take out a loan against) are typically more expensive than the premiums for term life insurance policies. For instance, the average annual premium a 40-year-old male would pay on a $250,000 whole life insurance policy is $3,638.76 a year.

Interest Rates

Whether you get a personal loan from a private lender or take it out against your life insurance policy, you will be charged interest. The interest rates on a personal loan against a life insurance policy are usually lower than the interest rates on a personal loan from a private lender. Life insurance loans can have interest rates in the single digits, while personal loan interest rates can be in the double digits. It’s worth noting, however, that a higher credit score may help you get a lower interest rate on a personal loan from a private lender.

The Takeaway

In an emergency, taking a personal loan against your life insurance policy might be helpful if you have the right kind of policy with enough cash value in it. However, you will generally have to wait at least 10 years after taking out a life insurance policy to borrow against it. And if you don’t repay the loan, you risk losing your life insurance policy, your beneficiaries could lose the death benefit when you die, and you may face tax penalties. A personal loan from a bank, credit union, or online lender could be an option to consider. You can obtain one of these loans at any time, as long as you qualify for approval, and funding can happen within days or possibly even the same day. If you’re shopping for a personal loan, Lantern can help you find one that best fits your needs. By filling out a simple form, you’ll get offers from multiple lenders at once, which makes comparing loan options fast and easy.

Frequently Asked Questions

Can I take a personal loan against my life insurance policy?
Is a personal loan or life insurance withdrawal better?
What is a personal loan against a life insurance policy?
Photo credit: iStock/Dean Mitchell
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About the Author

Jason Steele

Jason Steele

Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.
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