Can You Borrow Against a Term Life Insurance Policy?

By Amy Jorgensen

  • Overview

    Term life insurance is one of several options available to people who want to provide security for their loved ones following their death. While term life insurance is more affordable than other types of life insurance, there are some limitations to this type of coverage. Understanding these limitations can help you make a more educated choice.
  • Some Facts About Term Life Insurance

    Before discussing whether or not you can borrow against a term life policy, you need to some basic information about these types of policies. First, as the name suggests, term life insurance only provides coverage for a specified term. Those terms can range from one year to 10 years, depending on the policy you select. Second, term life policies can usually be renewed once they expire. However, the premiums will most likely go up. After you reach a certain age or if you develop chronic health problems, renewal may be denied.
  • Term Life Versus Whole Life

    The other popular life insurance option is whole life. While term life covers only a short, specific period of time, whole life policies last for the entire life of the insured as long as the premiums are paid on time. The policies cannot be canceled for age or health problems. However, whole life policies do cost more than term life insurance because the risk of having to pay out is much higher for the company. As a result, term life allows people to purchase larger amounts of coverage at more affordable rates.

  • Another Difference Between the Insurance Types

    The most important difference between term and whole life insurance policies, at least as far as the idea of borrowing against the policy is concerned, is that term policies do not build cash value. With whole life policies, however, cash value starts building from the beginning of the policy. That is because the premiums you pay are higher than they need to be so the excess can accumulate value. After you have paid on the policy for several years, the cash value will meet or exceed the death benefit. Because term life policies are not permanent and because premiums are lower, no cash value can be accumulated on them.
  • Borrowing on Your Policy

    When you borrow against your life insurance policy, you are essentially withdrawing part of the cash value which has accumulated over the years. That means you cannot borrow against your term life policy in most cases. However, you can borrow against your whole life policy as long as it has accumulated cash value. You can discuss whether or not this is a possibility and the amount that can be borrowed with your agent. The money you borrow can be used for any purchase you want, including paying bills, renovating your home, or even pre-paying your funeral expenses.
  • Repaying the Loan

    Although you have essentially only borrowed your own money, the loan you take out against your whole life policy needs to be paid back with interest. If the amount is not paid back before you pass away, the amount will be deducted from the benefits paid out. Before you choose this option, you should consider other loan options which might be more affordable and which may not affect the death benefits your loved ones receive.
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