Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insur...

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Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years

UPDATED: Dec 12, 2021

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The Brief

  • You can borrow from permanent life insurance policies
  • You can make loan payments out of pocket or by borrowing the interest
  • A policy can lapse if the loan exceeds the cash value

When looking at sample life insurance rates, you should consider if you can take out a loan.

Many life insurance companies allow you to borrow the cash value from a permanent life policy. Discovering more about life insurance companies that you can borrow from will help you determine if this is the best step for you.

Before learning about these types of companies, enter your ZIP code to get free life insurance quotes in your area.

How do you get a loan from life insurance companies that you can borrow from?

Most life insurance companies offer term life, permanent life, and final expense insurance.

Term life plans last for a limited period, permanent plans cover you for the remainder of your life, and final expense plans pay for your funeral and burial costs.

Permanent life insurance policies, such as whole life or universal life, include cash values along with death benefits. The cash value accumulates in a separate account within the policy.

Each time you make a payment, it’s split into three categories:

  • Cost of insurance
  • Fees and overhead
  • Cash value

The Insurance Information Institute says that accumulating a cash value from which you can borrow is one of many reasons to buy a permanent life policy.

Once your policy reaches a size set by the insurer, you can begin borrowing from the cash value. While you’re technically borrowing from yourself, life insurance providers act as loan companies that take life insurance as collateral.

If a policyholder fails to repay a loan, the company takes the amount due from your death benefit.

Most companies require that your policy grow before you can borrow. It can be five to ten years before you can borrow from a plan.

Permanent life policies have the highest life insurance rates that you can borrow from and are the only policies that provide loans.

When buying term life insurance, you’ll find that there is no cash value. Therefore, you can’t borrow from one of these policies.

While it might seem risky to borrow from your policy, there are some advantages. Since you’re borrowing from yourself, there is no approval process or credit check. You also don’t need to disclose how you plan on using the tax-free money.

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How much can you borrow from life insurance companies that you can borrow from?

The amount that you can borrow from a cash value varies by insurer. The maximum amount you can borrow is at least 90% of the cash value in most cases. There is no minimum amount that you can borrow from the company.

However, if your loan extends over several years, you might accrue compounding interest. A loan that reaches the size of your policy’s cash value will cause the policy to lapse.

A lapse will result in the loss of your coverage in addition to a high tax bill.

How do you pay back a loan from life insurance companies that you can borrow from?

One unique aspect of a life insurance policy loan is that you don’t have to repay the company. This can be helpful if you need money in an emergency. However, there are benefits to repaying your loan.

If you don’t pay back the loan before death, it will reduce the face amount of your policy when you pay it off.

The interest amount grows with outstanding payments, cutting into your death benefit. Even if you don’t repay a loan, you should make interest payments to avoid the growth of the loan.

There are three ways that you can repay your loan:

  • Periodic payments of principal with annual payments of interest
  • Paying annual interest only
  • Deducting interest from the cash value

Paying out of pocket is usually the best option because it doesn’t impact your loan or policy. Borrowing the interest results in a loan balance compound, increasing the interest and possibly resulting in a policy lapse.

Failing to pay back your loan can have severe consequences on your policy. If you feel as though you can’t make regular payments, you should avoid receiving a loan or consider life insurance companies that you can’t borrow from.

How do you monitor loans from life insurance companies that you can borrow from?

When you take out a loan from a life insurance company, you should monitor its progress. Tracking your loan will help you determine how much you’re benefiting and what you can expect in the future.

The best way to monitor your loan is by requesting an annual in-force policy illustration.

An in-force policy illustration shows your loan’s impact by using the current value to project future earnings. Multiple factors impact this informative document, including:

  • Current earnings The interest rate or dividend that helps your cash value grow
  • Mortality The cost of your life insurance policy
  • Expense charges Fees from the insurance company

To monitor the progress of your loan, you need to calculate the potential gain in the policy. A life insurance loan calculator should allow you to:

  • Add the net cash value, any dividends received, and outstanding loan balance
  • Subtract the cost basis, such as payments made into the policy

In addition to monitoring the progress of your loan, you can also determine how any changes will impact it.

To ensure that you’re receiving all of the necessary information to make informed decisions, your in-force illustration should include:

  • Repaying the policy loan in full
  • Paying rates and interest out of pocket
  • Borrowing future rates and loan interest
  • Your rates staying the same
  • Rates needed to endow the policy at maturity
  • Any other actions you’re considering

Monitoring the progress of a loan and knowing what you can expect in the future will help you determine if you should borrow from your policy.

If you’ve yet to purchase a policy, looking at a company’s loan history will help when considering quotes from life insurance companies that you can borrow from.

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Life Insurance Companies That You Can Borrow From: The Bottom Line

Policyholders can borrow from permanent life insurance plans. Companies use the cash value as collateral, which policyholders can pay back in various ways.

Knowing about life insurance companies that you can borrow from will help you determine whether you should take out a life insurance loan.

Now that you know about life insurance loans, enter your ZIP code to find free life insurance rates in your area.