Skip to Content
Father, mother and daughter laughing symbolizing a time of life when learning about life insurance is important.
Life Insurance Basics

Pros and cons of borrowing against your permanent life insurance policy

Emergencies may put you in dire need for cash. This article explains the pros and cons of borrowing against a permanent life insurance policy.

Should you borrow from your permanent life insurance policy?

It's not uncommon for someone with a permanent* life insurance policy to borrow against their policy. But there are advantages as well as disadvantages when it comes to borrowing from your policy.

On the advantage side, borrowing against your policy can be a much easier process when compared to a bank's loan procedures. How much you can borrow depends on the amount of cash value your life insurance policy has accrued over time, as well as your individual policy. In addition, the interest rates on life insurance policy loans can be competitive with most lending institutions.

Another advantage to life insurance policy loans are the flexible repayment terms. As a general rule, most life insurance loans come with an “at will” repayment plan. That means that while you may be sent a statement every month, you don't have to make a loan payment unless you want to. The interest will keep accruing and compounding, but it allows you the flexibility to skip payments if need be. However, it's important to monitor interest accumulation and the loan balance when using your policy's cash value to cover interest as, over time, this can cause your policy to lapse and even create a large tax bill.

When you take out a policy loan against your permanent life insurance policy, it's important to understand that it's just like any other type of loan in that interest will be added to your loan balance and increase the total amount that you owe. Moreover, if you were to die before the loan's outstanding principal and accrued interest were paid, the amount would be deducted from the death benefit of your life insurance policy, leaving your beneficiaries with less of a payout. This is another reason to be cautious about borrowing too heavily against your policy because you could be jeopardizing the very reason for purchasing insurance in the first place - the security and welfare of your beneficiaries.

Taking out a policy loan is a personal decision that should be met with a lot of thought. Your life insurance policy is meant to take care of your family members in the event of your unexpected death. If your policy death benefit is reduced, your family could be negatively affected if something happened to you. Be sure to explore other alternatives that may be available to you before you borrow against your life insurance policy. If you decide to borrow from your life insurance policy, be sure to ask the company or agent for an "in-force illustration" that will show the potential impact the loan may have on your policy.

 

*As long required premium payments are timely made.

 

 

WEB.1776.11.15

Arrows linking indicating relationship

Related Articles

Mother, father and daughter laughing together at home.

Common life insurance questions for different stages in life

Learn more
Husband and wife washing dishes together in the kitchen.

4 reasons why no medical exam life insurance might be for you

Learn more
Image from torso down of a businessman and businesswoman looking at documents while seated at a table.

How quickly are life insurance claims paid?

Learn more

All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

Learning Center articles may describe services and financial products not offered by Protective Life or its subsidiaries. Descriptions of financial products contained in Learning Center articles are not intended to represent those offered by Protective Life or its subsidiaries.

Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax-related decisions. For information about Protective Life and its products and services, visit www.protective.com.

Companies and organizations linked from Learning Center articles have no affiliation with Protective Life or its subsidiaries.