Your Guide to Life Insurance Loans

Life insurance loans are a convenient way to access the cash value of a permanent life insurance policy. One of the primary benefits of owning a whole life policy is that the policies build cash value.

Think of your premium payment as filling three buckets:

• The first bucket is the death benefit (the amount paid out to beneficiaries upon the policyholder's death). 
• The second bucket is for paying the carrier's fees and servicing costs for the policy. 
• The third bucket is for the cash asset, which belongs to the policyholder and grows over time on a tax-deferred basis. 

Borrowing against life insurance is a way for policyholders to quickly access the accumulated cash in the third bucket. Note that because Ethos whole life policies are available to customers ages 66-85, they won't accrue significant interest and are not typically used as an investment vehicle. But whether you're considering an excellent Ethos term life insurance policy or a whole life policy, it's valuable to understand how life insurance loans work with other carriers.   

Life insurance loan interest rates are typically between seven and eight percent, but taking a loan against cash value life insurance differs from a traditional bank loan in several ways. Since you're borrowing your own money, no credit checks or loan approvals are required. This makes life insurance loans an attractive option for people with poor credit or who may not qualify for other types of loans.

The cash asset serves as collateral for the loan. Depending on the terms of your policy, you may be able to borrow up to 90% of the balance. 

Life insurance loans versus other types of loans

Unlike a bank loan, life insurance loans don't have structured repayment plans. In fact, life insurance loans don't require repayment at all. If you don't repay the loan, the insurance company will deduct the outstanding balance from the death benefit and pay your beneficiaries an adjusted amount – the net of the loan's principal and accrued interest.  

When you take a loan on your whole life insurance cash value, the policy's cash asset itself isn't reduced. This means the cash value will continue to grow, tax-deferred, even after you receive your money. 

Life insurance loans work the same way a home equity line of credit does – the value of your home continues to appreciate even after you take some equity out. The growth offsets some interest costs and drives down the net interest rate paid for the whole life insurance loan. Unlike a HELOC, though, interest paid on a loan against a life insurance policy isn't tax-deductible.

If you choose not to make any payments on your whole life insurance loan, the interest will compound.  This, combined with the principal amount, could eventually equal the total cash value of your policy. Should that occur, your policy would lapse, and you may be responsible for paying taxes on the gross value of the policy. That's why it's important to pay close attention to the amount owed and your policy's cash value. Paying the interest charges as they accrue will help you avoid this situation and reduce the loan cost. 

Does term life insurance have cash value?

This is a common question. Since term life insurance generally doesn't build cash value, you can't take a loan on term insurance. Term life insurance is an affordable way to protect the financial stability of your loved ones, but it doesn't include the investment component that whole life does. Review our life insurance guide for more information about the differences between term and whole life insurance. 

It's quick and easy to use our term and cash value coverage calculator to discover how much you should buy.

How to borrow from life insurance

Obtaining a loan on life insurance policies is straightforward. Since there are no credit checks or lengthy applications, simply contact your carrier and request the amount you need. Funds are generally transferred within one to 15 days, and there are no restrictions on how you use the money. Because the process is fast, life insurance loans are often used in emergencies where there's an immediate need to access cash. Of course, you can also use the funds for everyday expenses, debt consolidation, or even a vacation.

Ethos offers both term and whole life policies. You can get a free quote or start your application online to see what you may be eligible for. Although Ethos does not offer loans on our policies, you may have an existing policy that allows it, and understanding how that works is important in choosing your Ethos policy. 

Our life insurance FAQs also contain answers to questions about applying for online life insurance and what makes Ethos different.