Can You Borrow Against Term Life Insurance?

Can you borrow against term life insurance? No, you cannot. Term life insurance is not considered an asset that has a value you can borrow against. But there is another type of life insurance you can buy that does have value as an asset you can borrow against – we’ll go over everything below to help you make an educated decision.

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Why Can’t You Borrow Against Term Life Insurance?

The reason you can’t borrow against term life insurance is because it does not have cash value. Term life policies are simple and straightforward: they cover you for a particular term (10, 20, 30 years, etc.). If you’re alive at the end of the term, the policy expires. If you die within the term, your loved ones can file a claim to get the income-tax-free death benefit. Easy peasy, right?

Term life does have many benefits, even though it doesn’t build cash value.

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Most affordable form of coverage. There is no cheaper way to give your family financial peace of mind. Term life is the lowest-price form of coverage, no matter which term you choose or which insurer you apply with. It will always be cheaper than permanent coverage.
Range of coverage lengths. If you only need coverage until the kids are grown, for example, you can select the term length that meets your needs rather than paying for lifelong coverage you may not need.
Ability to “stack” or “ladder” coverage. If you have lots of financial obligations now, like raising a family, you can buy a policy for a higher face amount for a term that covers the length of those obligations – the next 15 years, for example. You can then “stack” that policy by also buying a policy with a lesser face value that lasts for a longer term – the next 40 years, say. That allows you to leave your loved ones with the right amount of money no matter what stage of life you’re in.
Possibility to convert to a permanent policy. Most insurers give you an option to convert your term policy into a permanent policy. They’ll have stipulations on how and when you can do this, so if you think you might want this down the road, be sure to ask your agent about this when you buy your policy.
Possibility to renew on an annual basis. Most insurers also give you an option to renew your term policy on a year-by-year basis after the initial term expires. This can be handy if you know you won’t need that coverage for much longer, but it’s also an expensive option since your price renewal is going to increase with your age each year.

Those are all great benefits – but none of them create a tangible asset you can borrow against. Below, we’ll go over the types of life insurance you can borrow against because they contain cash value.

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Permanent Life Insurance: Cash Value Is an Asset

Okay, so we know the answer to “Can you borrow against term life insurance?” is “no.”

So what can you borrow against?

Woman sitting on her floor with her arms raised in a shrug

You can borrow against the cash value that comes with any type of permanent life insurance. What does this mean? Every payment you make gets split up: first, the insurer takes what it needs to cover the cost of your coverage. Whatever is left goes into your cash value account. The type of permanent policy you have (whole, universal, variable) will determine how that cash value grows. In general, the insurer pays interest on your cash value, but the rate and crediting methods will change based on your policy type. Here’s a quick summary:

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Whole life. The insurer pays a low, flat rate of interest that never changes. It’s locked in when you buy your policy. Expect rates in the 1%-2% range.
Indexed universal life. You have the option to tie your interest credits to the performance of a particular stock index, like the S&P 500. If it does well in a year, your insurer will credit you with a slightly higher interest rate. If it loses value that year, you’ll get either a very low flat rate or zero interest credited. You won’t lose a dime, however, since none of your cash is actually invested in the market.
Variable universal life. You have the option to actually invest your cash value in selected market funds. This gives you more control over the money, with the ability to grow it faster than with a flat rate of interest. However, there’s also the potential for loss since your money is actually invested. This option works best for people who understand the market and are willing to do the homework needed to monitor the account and make well-researched decisions. If that’s not you, we recommend sticking to one of the other policy types so you’re protected against losing any of your cash value.

Your cash value grows tax-deferred over time, just like a 401(k) or IRA. What does that mean? It means you don’t owe income tax while that money is growing. Since there’s more in the account, it compounds and grows faster.

Later, once you’ve accumulated enough, you can start using that cash value for anything you like: supplemental retirement income, projects around the house, help with the kids’ tuition bills, a family trip…it’s all up to you.

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Ways to Access Your Policy’s Cash Value

Okay, your next question is probably about how to pull money from your cash value. There are several different ways:

Close-up of a woman’s hand holding out a stack of hundred dollar bills, symbolizing the different ways you can borrow against permanent life insurance’s cash value

Policy loan. You can borrow against your permanent life insurance’s cash value with a private loan from your insurer. It will never show up on a credit report, and you’ll pay a smaller amount of interest than you would if you got a similar loan through a bank. You also don’t technically have to pay back this loan. If you do, you’ll avoid accruing future interest. If you don’t, however, the insurer will deduct what you owe on your loan from the death benefit before they pay it out to your beneficiary(ies). Another benefit is that borrowing against your insurance leaves the full value of the cash value in your account so it can continue to earn interest and grow over time.
Withdrawal. You can also withdraw a portion of the cash value in what’s called a “partial surrender.” Insurance-speak aside, this just means you are removing a portion of the cash value from the account, and agreeing pay any partial surrender fee the insurer may charge. Compare any fee against the cost of the interest from a policy loan, if you’re not sure whether to take a loan or a withdrawal. Also consider the fact that you’ll have less cash value in the account, so future growth will be less, too.
Surrender the policy. In insurance-speak, “surrendering” a policy means canceling it with your insurer. Although we never recommend this, if you do cancel, you can get a payout of your cash value. There will be a surrender fee, which the insurer will subtract before they pay you the remainder of your cash value balance. Always check your policy paperwork so you know how much this would be before you take this action.
Use it to pay your policy premiums. This is a great option for many of our clients. You can ask your insurer to use your accrued cash value to pay your monthly payments. It’s up to you to ensure there’s always enough cash value in your account to make the payment and cover the minimum required amount to keep your policy funded. As long as you set a reminder to check your account balance periodically, this is a great option to use your cash value.

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Can You Borrow Against Term Life Insurance?

As we’ve covered, that answer is no. But you can borrow against your permanent life insurance’s cash value.

The best way to think of cash value is a type of mandatory savings account. It’s not an investment (unless you have a variable life policy that actually lets you invest your cash value). It’s not a retirement plan. It is a savings component that complements the death benefit coverage provided by your policy. If you have people who depend on you financially, you need life insurance – but could you also use an extra way to save a few thousand or even tens of thousands of dollars over the life of your policy? If so, permanent coverage may be the right choice for your family.

Need more information to help figure out what type of life insurance is right for you? Check out our comprehensive guide to life insurance types and options here.

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