Are life insurance loans a bad idea?

If you find that you don’t have enough savings to cover a financial emergency, borrowing from your life policy may seem appealing at first. You may have had it for many years, and the ability to get a cash loan quickly was probably the main reason you bought permanent life insurance.

Your whole life or universal insurance policy might seem like a good source of financial assistance in times of crisis. However, you should consider the potential risks of not paying the interest. Or worse, you could lose your life insurance policy’s dividends which will cover the cash advance.

As with homeowners and auto insurance life insurance serves a greater purpose in a holistic financial strategy that is specific to each individual’s financial goals and life circumstances. It is possible to find better options such as opening a home equity credit line (HELOC), or taking out a personal loans.

What is a cash price?

The cash value of your life insurance policy earns interest, but is not subject to your death benefit. The segregated cash value can be used to obtain a loan. You have the option to create cash value with a variety of common life insurance products.

  • Whole life insurance policy — This policy pays a fixed monthly premium for the entire policy’s life with a guaranteed death benefit. The minimum guaranteed rate is the minimum cash value.
  • Universal life insurance policy — This insurance policy offers more flexibility. The monthly payment can be divided into two parts. One is for life insurance, and the other goes towards savings and investment to build cash value.
  • Variable universal life — This combination of a death benefit and a savings account allows you to invest in stocks or bonds, as well as other assets. This allows you to grow your policy faster, but also takes on the risk of becoming an investor.

Life insurance loans: The pros and cons

It is a good idea to have liquid funds available in case of emergency. Problems can quickly develop if life insurance policy loans aren’t carefully monitored and are allowed to lapse, or if cash value loans are used simply for everyday living expenses.


  • Tax benefits — Cash values loans are exempt from tax. Your cash value terms, potential dividends and cash growth will continue to increase your total cash value. This means that your money will grow tax-deferred in your policy account.
  • This is not a standard loan. You can pay your cash value loan anytime you like, whether it’s monthly, quarterly or annually. Contrary to conventional loans, a policy loan does not require you to repay it. The death benefit will deduct any money borrowed from your beneficiaries.
  • Credit is not affected. You can borrow money from your policy at anytime, for any reason. There is no credit check, qualification or application. The loan is private and will not be reported on your credit report.


  • Consider the costs — A cash value loan will cost you interest at 5% to 9.9%, just like a conventional loan. Al Barnes, an Alabama specialist in insurance, said that this is a common charge. The interest you have not paid will be added to the loan amount. It is also subject to compounding.
  • Paying your interest on unpaid loans can lead to financial problems. You could face financial difficulties if your insurer instructs you to pay your loan interest using dividends or your life insurance policy. Unpaid interest will be considered income and added to the loan balance.
  • Unexpected consequences for policy beneficiaries — If you die unexpectedly before your policy loan is fully paid, the entire loan amount plus accrued interest will be deducted from the death benefit for your beneficiaries.

Questions frequently asked

Which is the best life-insurance company?

For those who are dependent on you, life insurance is an essential part of your financial plan. There are many great life insurance companies. You will want to choose one that meets your financial and personal goals. Some considerations to make when searching for coverage include:

  • Product range
  • Financial strength
  • Customer services
  • Price and value of the policy
  • Claim handling

What amount of life insurance do you need?

You will need to purchase the necessary amount to achieve your goals, whether you want to leave a legacy for family members or to give money to charity. Although each situation is different, many people wish to leave enough life insurance to continue providing support for their dependents. Financial experts recommend that you factor in income sources other than Social Security and investments to help determine how much life insurance you need.

What is better, whole-life or term insurance?

You may need different types of policies to meet your financial goals. A term policy is the most cost-effective and simple option if you are aiming to leave a specific amount for your dependents. A whole-life policy, on the other hand, may be more suitable if you are looking to build equity that you can access over your lifetime or if you prefer guaranteed payouts for beneficiaries regardless of your age. A financial planner or an insurance professional can help you decide the right type of policy for your needs.