Whole Life Insurance Loan 101: What It Is & How to Use It
Updated: Oct 10
Can I take a loan from my whole life insurance policy? Yes. Because a whole life insurance policy is a type of permanent life insurance that accrues cash value, you can secure a loan using that cash value as collateral. Term life insurance isnt eligible for this type of financing.
Using cash value for whole life insurance policy loans Only permanent life insurance policies, including whole policies, come with a cash value component. As you pay your premiums, your insurance provider puts some of that money into a separate account. Then, that money grows. The way your cash value grows depends on the type of permanent life policy you have. There are a few different types of permanent policies, including:
Whole policies, which grow your cash value at a minimum guaranteed rate set by your insurance provider. (You can also get whole life insurance with no medical exam and no waiting period.)
Universal policies, which grow your cash value at a money market rate of interest.
Variable policies, which invest your cash value and grow that account based on the investments performance.The Insurance Information Institute (III) reports that whole policies are the most common type of permanent life insurance, so well focus on these policy types here. What you need to know is that with whole policies, your insurance provider puts a portion of your premiums into an account where that money grows at a steady rate (e.g., 4%). Thats called your cash value. Why does this cash value matter so much when it comes to life insurance loans? Because when you take out this type of loan, your insurance company uses the cash value as collateral for the loan. Think of it this way. When you get a mortgage, your house serves as collateral. With a car loan, the vehicle acts as collateral. Basically, it gives the organization offering you the loan something they could recoup if you default on the loan. The same goes for whole life insurance policy loans. The cash value acts as collateral, securing the loan. And that does mean that if you dont repay the loan, you could lose that cash value. But well get more into that later.
Getting a whole life insurance loan In order to get this type of loan from your life insurance provider, you usually just need to do two things. First, you need to wait until your cash value accumulates. This usually means paying your premiums for at least five years so money can build up in that cash value account, which you can then use as collateral for your loan. Once your cash value has accrued to a certain level, actually taking out the loan is fairly straightforward. Your policy provider will probably have you fill out a form and will let you know about the whole life insurance loan interest rate they can offer you. Once you agree to the rate and complete the paperwork, you can usually expect the loan funds to hit your account within a few days. You dont need to worry about a credit check, nor do you need to be concerned that the loan will affect your credit score. Your insurance provider handles the entire financing process privately, so there are no credit requirements or ramifications here. In fact, you can get this type of loan even with bad credit, assuming you have sufficient cash value to borrow against.
How does a loan from a whole life policy work? Lets go over some key details here:
Loan amount: You have the option to choose how much of your cash value you want to borrow against. If your cash value account has reached $50,000, for example, you could choose to only borrow half.
Whole life insurance loan rates: Your insurance company probably has set interest rates for these types of loans. The interest will accrue and, at a certain point (usually each year), compound just like it would with any other loan. That said, whole life insurance loan interest rates can usually compete with the best rates available today. So while you still need to worry about managing the interest, you can expect relatively low rates.
Cash value growth: When you take out this loan, youre not actually withdrawing the cash value of your whole life policy. Instead, the cash value stays in your account and simply serves as collateral. Thats good news because it means your cash value can continue to grow even while you have the loan.
Repayment: Unlike most other loan types, your whole life insurance loan doesnt come with a set amortization (i.e., payoff) schedule. You wont need to worry about making monthly payments, for example. You can pay the money back when you want. But failing to repay the loan and its interest can come with some serious drawbacks. To make the most of this type of financing, most financial experts recommend going in with a set plan to pay off what you borrow.
Using the loan: Once you take out the loan, you can use the money however you want. You could use it to bridge a serious financial emergency, but you could also use it to take your dream vacation. Ultimately, as far as loans go, whole life insurance loans offer some significant benefits. But there are potential drawbacks to consider, too. First, the good news.