Can You Borrow from Term Life Insurance?

Can you borrow from term life insurance? In a word, no. Term life insurance isn’t a financial asset you can borrow against. We’ll explain why that’s not possible below, along with a few reasons why buying term life is still a great decision to protect your loved ones. We’ll also explain what kind of life insurance you can borrow from, if that’s a feature on your must-have list.

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Can You Borrow from Term Life Insurance?

As we mentioned above, you cannot borrow from term life insurance. That’s because term life is not considered a financial asset.

Woman’s hands holding pages of financial charts

When you buy a policy, you’re entering into a contract with the life insurance company. If you pass away during your term, they will pay your beneficiary(ies) the death benefit. There is no money paid to you, and no money changes hands until you’ve passed away, so there’s nothing you can borrow against.

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But There Are Ways to Access the Death Benefit In Your Lifetime…

Most term life insurance providers offer what we call “living benefits” – ways to use your coverage while you’re alive. If you thought you had to be dead to use your life insurance, that’s no longer the case! Every insurer offers slightly different benefit amounts and covered conditions, but here are some common ones:

Female doctor reassuring her patient in her office

Terminal illness benefits. If you’re diagnosed with a terminal illness, most insurers will let you access some or all of the death benefit. Once you submit the required paperwork, you’ll be able to pull some of that money to help with treatment, home modifications, or anything else you may need or want – like a bucket-list event for friends and family. Many insurers provide this terminal illness rider (policy add-on) for free.
Chronic illness benefits. This rider usually comes with an extra cost, but it lets you tap into the policy’s death benefit if you’re diagnosed with a chronic illness such as asthma or arthritis.
Critical illness benefits. This rider also usually comes with an extra cost, but if you have a heart attack or stroke (common critical illnesses), you can use some or all of your death benefit to help with medical bills, treatment, in-home care, or anything else you need.
Long-term care benefits. This rider lets you use some or all of your death benefit to pay for care if you need help completing a certain number of what we call the “activities of daily living” (ADLs). These include things like getting dressed, bathing, using the bathroom, and moving around your house. This kind of care isn’t limited to senior citizens, either – many people need care for more than a year due to a disability, while they recover and get back on their feet (literally and metaphorically).

Think of riders as a safety net. You don’t plan for any of these things to happen, but if they do, you have a little extra financial help as you deal with them. One thing to keep in mind is that with paid riders, you have to add them to your policy at the time of purchase – not when you develop the illness later in life. Another thing to keep in mind is the fact that your loved ones’ death benefit payout will be reduced by the amount you use through any of your riders.

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So Which Types of Life Insurance Can You Borrow From?

Remember what we said about term life insurance not being considered a financial asset? That’s not true for all types of coverage.

Permanent life insurance comes with a cash value component, which is considered a financial asset. It’s a type of savings account attached to your policy that’s funded over time by both your payments and interest paid by the insurer. It’s your money, and you’re allowed to borrow from it as well as withdraw from it if you need it.

Every type of permanent life insurance will contain a cash value component:

Happy couple getting a term life insurance quote online

Whole life – a low, flat rate of guaranteed interest with zero risk of loss and guaranteed accumulation
Universal life – a low, flat rate of guaranteed interest with flexible payments with zero risk of loss and guaranteed accumulation
Indexed universal life – variable rate(s) of interest based on a market index’s performance with zero risk of loss and the chance to grow your cash value faster, but with little or no guarantee of accumulation
Variable universal life – variable rate(s) of interest based on investments you choose with a risk of loss and the chance to grow your cash value faster, but with little or no guarantee of accumulation

Each policy type has its own pattern for accumulating cash value. Beyond that, each insurer may add additional rules or options for the way you build cash value. That’s why it’s helpful to have someone to talk to about all this – and that’s exactly what we’re here for.

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How to Borrow from Your Permanent Life Insurance Policy

Man using his smartphone to get a policy loan to borrow from his permanent life insurance policy

First, you want to let your cash value build up and grow over time. Don’t think of cash value as any sort of get-rich-quick scheme. It’s a slow process, meant to give you an extra source of cash years down the line. A good use of cash value? Planning ahead for a child’s college tuition, for example. If you need cash now or in six months or a year, this isn’t going to happen.

Insurers also have stated minimums in terms of how much money needs to be in your policy at any time. This is to ensure there’s always enough to cover the cost of your coverage. You need to make sure your cash value grows up and over this amount so you won’t accidentally defund your policy and lose coverage.

Second, once your cash value has built up, you can submit a request to your insurer to borrow from it. This is called a policy loan, but it’s not the kind of loan that goes on your credit report. This is just a private transaction between you and your insurer. The insurer will loan you an amount of money, with your cash value account as collateral. They’ll charge a small amount of interest (often just 2-3%) as long as the policy loan remains outstanding.

Life insurance agent helping his client read the statements for his whole life insurance policy loan

If you pay the loan back, you’ll stop accruing interest charges. But, technically, you aren’t required to pay it back. When you pass away and your loved ones file a claim for the death benefit, the insurer will deduct any balance left on your loan first. It’s up to you to judge how best to handle that loan, whether to pay it back in full, in part, or not at all.

Cash value is an asset that gives you a handy financial safety net no matter what happens later in life. And best of all, it goes hand-in-hand with the policy’s death benefit: you get financial security for your loved ones once you pass away, plus a valuable asset for you in your own lifetime!

➡️ Rather talk to a real person to figure out which type of life insurance is best for you? Call us at(800) 823-4852 or click the button below to get a free term life quote here on our website!

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