How much money can I borrow from my life insurance policy?

UPDATED: Jan 2, 2014

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Asked January 2, 2014

1 Answer

Depending on the type of life insurance you have, you may not be allowed to borrow against the policy at all. Term life and final expense insurance are two types of insurance that do not provide for a cash value, while universal life, variable life and most other types of permanent life insurance do have a cash value built in. Your life insurance statements should tell you what the cash value of your policy is, or whether you have a cash value at all.

There are 3 ways that you can build up cash value in a life insurance policy. The first method is to make extra payments into the policy, where the additional value of your premiums will go directly into the cash value of the policy. The second method is to have a variable life insurance policy which gains cash value from the performance of the investments on the policy. Finally, each premium payment you make towards the life insurance policy will contribute a small amount towards the cash value which you can later borrow against.

The cash value of a life insurance policy also earns interest, so leaving it in the policy as long as you can before you borrow against it will help build cash value faster. Keep in mind, too, that the loan still has to be paid back, along with interest. If you do not pay back the loan against the policy, the amount owed and the interest against the loan will be deducted before the policy is settled after you die.

The cash value that you can borrow against is separate from the face value of the policy. The face value is the actual amount you purchased the policy to cover, and that amount cannot be lowered, even if you have an outstanding loan against the cash value. Cash value is in addition to the face value, and will typically be only a fraction of the amount of the actual face value. Think of the cash value as the amount you accrue above the amount you purchased the policy for.

Answered January 2, 2014 by Anonymous

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