You cannot borrow against most term life insurance policies
Term life insurance is designed to pay a death benefit if you die during the coverage period — typically 10, 20, or 30 years. Unlike permanent life insurance (whole life or universal life), term policies build no cash value while you are alive. Because there is no cash value stored in the policy, there is nothing to borrow against.
If you own a term policy and need money, you have a few actual options, but borrowing from the policy itself is not one of them. Understanding what you can and cannot do with a term policy helps you plan for cash needs without making a costly mistake.
Key Takeaways
- Term life insurance has no cash value, so you cannot take out a loan against it the way you can with whole life or universal life policies.
- You can surrender a term policy for its cash value, but most term policies have zero cash value and will return nothing.
- Some term policies convert to permanent policies, which then build cash value you could borrow against in the future.
- If you need money now, selling your policy to a third party (a life settlement) is possible but usually only makes sense if you are older or have a serious health condition.
- Letting a term policy lapse to free up premium money is permanent — you lose all coverage and cannot get it back at the same rate.
Why term policies have no borrowing option
Term life insurance costs less per month than permanent insurance because the insurance company takes on less risk. You pay only for the death benefit during the term. Once the term ends, the policy expires and the company owes you nothing. There is no savings component, no investment account, and no cash accumulation.
Permanent policies (whole life and universal life) cost more because part of your premium goes into a cash value account that grows over time. That cash value is what you can borrow against. Term policies do not have this account, so there is nothing to borrow.
This is why term insurance is cheaper — you are paying for pure death protection, not a savings vehicle. If you need both insurance and a way to borrow money, you would need a different type of policy.
What happens if you surrender a term policy
You can cancel (surrender) a term policy at any time by contacting your insurance company. When you do, the company will tell you whether there is any cash value to return. For most term policies, the answer is zero.
Some term policies have a small cash value in the final year or two of the term, but this is rare and usually amounts to only a few dollars. You will not get back the premiums you paid. The insurance company keeps those payments as the cost of providing coverage while the policy was active.
Before you surrender a policy, check whether you still need the death benefit. Once it is gone, you cannot get it back at the same rate — your age will be higher and your health may have changed, both of which raise the cost of new coverage.
Converting a term policy to permanent insurance
Many term policies include a conversion option that lets you switch to a permanent policy (usually whole life) without a medical exam. The conversion happens at a higher premium than your original term rate, but you do not have to prove you are still healthy.
If you convert to a permanent policy, that new policy will build cash value over time. Once it does, you can borrow against that cash value. However, conversion is a permanent change — you will pay significantly more per month for the rest of your life, and the new policy is a separate contract with its own terms.
Check your policy documents to see whether you have a conversion option and when it expires. Most conversion rights end when the term does, though some policies allow conversion for a limited time after the term ends.
Selling your policy through a life settlement
A life settlement is a sale of your policy to a third party (usually an investment company) for a lump sum of cash. The buyer takes over the premium payments and receives the death benefit when you die. This is different from surrendering the policy to the insurance company — you are selling it to someone else.
Life settlements are rarely worth considering for term policies because the buyer needs to see a financial return. They will pay you only if they believe the death benefit will be large enough and you are likely to live long enough for the investment to make sense. For most people with term policies, this math does not work out.
Life settlements make more sense for permanent policies with high death benefits, or for people who are older or have a serious health condition. If you are considering this route, work with a broker who specializes in life settlements — they can tell you whether your policy has any market value.
Stopping premium payments to free up cash
If you are struggling to pay your term insurance premium, you might think about letting the policy lapse to free up that monthly money. This is a permanent decision. Once the policy lapses, your coverage ends when ready and you cannot restart it at the same rate.
If you later want life insurance, you will have to explore for a new policy. Your age will be higher, and if your health has changed, your new premium will reflect that. Many people who let policies lapse end up paying much more to replace them — or find they cannot get coverage at all.
Before you let a policy lapse, contact your insurance company to discuss options. Some companies offer reduced-benefit policies or extended-term options that let you keep some coverage at a lower cost. These are not the same as borrowing, but they preserve some protection while you work through a cash shortage.
Borrowing money while keeping your term policy
If you need cash and want to keep your term insurance, you have options that do not involve the policy itself. You can take out a personal loan from a bank or credit union, borrow against a home equity line of credit (if you own a home), or use a credit card for smaller amounts.
These routes are separate from your insurance and do not affect your coverage. The downside is that they come with interest rates and repayment terms you have to negotiate with a lender, rather than with your insurance company.
The advantage is that you keep your term insurance intact. If you die while the loan is outstanding, your beneficiary receives the full death benefit — the lender cannot claim it. The loan is your personal debt, not a claim against the insurance money.
Frequently Asked Questions
Can I borrow against a term life policy I just bought?
No. Term policies never build cash value, regardless of how long you have owned them. The only exception would be if your policy includes a conversion option and you convert it to a permanent policy — but that is a new policy with a higher premium, not a loan against your original term coverage.
What if I need money before my term ends?
You can surrender the policy (usually getting nothing back), sell it through a life settlement (rarely worth it for term policies), or borrow money through a separate personal loan or line of credit. Do not let the policy lapse just to free up the premium — you will lose coverage permanently and pay more to replace it later.
Is there any way to get cash out of a term policy without canceling it?
Not from the policy itself. Term policies have no cash value to access. Your only option to keep coverage is to borrow money from an outside source — a bank, credit union, or home equity line — and keep paying your term insurance premium separately.
If I convert my term policy to whole life, can I borrow when ready?
Not when ready. The new whole life policy will build cash value over time, but it takes years before the cash value is large enough to borrow against. The exact timeline depends on the policy and how much premium you pay. Ask your insurance company for a projection showing when cash value will be available.
What happens to my death benefit if I take out a life settlement?
You no longer have a death benefit. The buyer of the policy becomes the owner and beneficiary. When you die, the death benefit goes to them, not to your family. This is why life settlements are only practical in specific situations — you are trading your death benefit for cash today.