Borrowing Funds from a Cash Value Life Insurance Policy

When funds are borrowed from a cash value life insurance policy, the policy holder will pay no income taxes. This is because these funds are treated as being a debt, and not a taxable distribution.

A policy loan, however, should be paid back. This is because the balance on the loan will be charged interest. In addition, should the policy holder pass away while there is still an unpaid loan balance, this amount will be deducted from the total amount of death benefit proceeds that are received by the policy’s beneficiary.

In addition, life insurance policy loans that are taken from a cash value life insurance policy will also likely have associated administrative costs and other fees. With this in mind, a policy holder should carefully consider exactly how much the borrowed funds will cost prior to taking a policy loan.

Alternatively, the cash value in a life insurance policy can provide policy holders with a viable option for obtaining funds that are needed for an emergency situation or to pay off other high interest debt such as a credit card balance.

What is Cash Value Life Insurance

There are many different types of life insurance policies on the market today. The two primary classes of life insurance include term and permanent. Term life insurance is considered to be the most basic form of coverage, providing a certain amount of death benefit in exchange for a premium payment. Should a policy holder pass away during the “term,” or time frame, of the policy being in-force, a beneficiary (or beneficiaries) will receive the death benefit proceeds. Term life insurance does not offer any type of underlying cash value build up.

Permanent life insurance provides policy holders with an amount of death benefit, along with a cash value or savings component. With these plans, individuals can accumulate a significant amount of savings over time that may be borrowed or withdrawn should the individual have need for the funds. Therefore, in addition to providing a death benefit, cash value life insurance can offer a number of other advantages.

Most life insurance policies do require the applicant to undergo a physical exam, to determine how much of risk they may be to the insurance company, though there is the option of looking into a no medical exam life insurance policy, at a high premium rate.

Types of Life Insurance Policies that Contain Cash Value

There are several types of life insurance that offer an underlying cash value option. These include:

  • Whole Life Insurance – On top of providing death benefit proceeds, whole life insurance policies also offer a savings component that allows the build-up of cash – typically at a minimum guaranteed rate of interest. This cash accumulates on a tax deferred basis, meaning that the gain on these funds will not be taxed until the time that the policy holder withdraws the money. Policy holders can usually withdraw or borrow this cash for paying off debts, funding a child’s future education fund, paying emergency expenses, or for nearly any other purpose that they see fit. The cash that is contained within a whole life insurance policy can also be borrowed. Because the funds are considered to be a loan in this situation, income taxation can be avoided. However, although it is not required, the balance of the loan should be repaid. Otherwise, any unpaid loan balance that remains at the policy holder’s death will be deducted from the amount of the death benefit proceeds. For details click here.
  • Universal Life Insurance – With a universal life insurance policy, cash value will grow over time based on the underlying interest rate. Similar to with whole life insurance, a portion of each premium paid into a universal life policy will go towards funding the death benefit, and a portion will also go to funding the cash value component. Universal life insurance policies essentially offer their policy holders two death benefit options. First, the death benefit can remain level, while the growth of the cash value can help in offsetting the potential periodic increases in the monthly insurance charges. The other option allows the policy’s death benefit to equal the initial amount selected by the policy holder, plus the amount of the cash value. The needs of the individual policy holder should determine which option is ultimately selected. More details here.
  • Variable Life Insurance – Variable life insurance policies offer a combination of death benefit protection along with an opportunity for investment. These plans provide the ability to invest in professionally managed investments – and, depending upon the performance of these underlying investments, the cash value in a variable life plan could grow substantially over time. Similar to both whole life and universal life, a variable life insurance policy holder may have access to his or her cash through either a withdrawal or loan option. Visit this page for more information.

Is A Cash Value Policy Right For Me?

As you can see, there are several different types of life insurance plans that you can choose from when you’re buying a plan that builds cash value. Each type of plan listed above has different advantages and disadvantages that you’ll need to consider to ensure that you’re getting the best insurance rates.

When you’re looking to get life insurance, it can be difficult to decide which kind of policy is right for you, but it’s vital that you make the best decision for yourself and your family. To begin with, if you’re looking to get the cheapest premiums for your life insurance coverage, any of these plans are not going to be the best option. Any type of permanent life insurance plan is going to be considerably more expensive than other options. If you want to get an affordable life insurance plan, then a term policy is going to be the best option.

In most cases, a cash value policy is an excellent option for anyone that wants to use their plan for estate planning. This is a great way to help offset some of the massive taxes that your family could encounter when you pass away. Additionally, the cash value inside of the plan can be invested. If you’re looking for another way to diversify your investment portfolio.

Also, these plans are a great option for anyone that does not want to worry about having to reapply for insurance coverage in the future. With these plans that build cash value, as long as you pay the monthly premiums, you’ll never have to reapply for insurance coverage again.

Getting Affordable Life Insurance Coverage For Cash Value Plan

Regardless of which type of insurance plan that you choose, it’s important that you get the lowest premiums available. There are a few simple things that you can do that can help you save hundreds of dollars on your coverage.

The first thing that you should do is cut out any tobacco that you currently use. If you’re a tobacco user, either a smoker or you use chewing tobacco, you can expect to pay much higher premiums for your coverage. In fact, smokers are going to pay around twice as much for life insurance coverage versus a person that doesn’t smoke. If you want to save money, it’s time to kick the cigarettes to the curb.

The next thing that you should do is shed any extra pounds that you’ve been carrying around. Before the insurance company approves your application, they are going to require that you take a medical exam, and the results of the medical exam will play an important role in how much you pay for your coverage. Starting to get regular exercise and cutting out the junk food is a great way to get better results from the medical exam, which is going to translate into better monthly premiums for your plan. If you want to save money, it’s time to lace up the running shoes.

The best way to ensure that you’re getting the lowest premiums is to work with an independent insurance agent. Unlike a traditional insurance agent, an independent broker works with dozens of life insurance companies across the nation, which means that they can bring all of the best rates directly to you. Every insurance company is different, which means that you could get drastically different rates depending on which company that you get the quote from. Instead of wasting your time calling all of the companies yourself, let one of our agents do all of the work for you.

Borrowing Money From Your Life Insurance Coverage

As you can see, cash value policies are a complex subject. There are several different kinds that you can choose from, but they are an excellent option in case you need to borrow money in the future. If you have any questions about borrowing money on your life insurance plan or about the different options available to you, please contact one of our agents today. We would be happy to answer those questions and ensure that you’re getting the best plan possible.


Susan Wright, CLU, ChFC, RHU, REBC, ADPA, CITRMS, CIPA has been in the insurance and financial field for over 27 years. Even with years of experience, she continues to create new resources for others. Everything from books to training material.

Susan received her MBA from St. Louis University and her BA from Michigan State University.

She has worked in several areas but excels in writing material for both finances and insurance. Her goal is to give professionals credibility and assist in streamlining the sales process.

She has written countless articles for a variety of websites.