You can borrow against some term life insurance policies, but most term policies don't allow it

Most term life insurance policies do not have a cash value, which means there is nothing to borrow against. Term insurance is designed to be affordable protection for a set number of years — typically 10, 20, or 30 years. When the term ends, the coverage ends, and you get nothing back.

A small number of term policies do build cash value over time, usually through an add-on called a rider. If your policy has cash value, your insurance company may let you borrow against it. The amount you can borrow is typically up to 90 percent of the cash value you have built up. However, you will pay interest on the loan, and any unpaid balance reduces the death benefit your beneficiaries receive.

The best way to know whether your specific policy allows borrowing is to call your insurance company directly with your policy number. They can tell you whether you have cash value and what your borrowing options are.

Key Takeaways

  • Standard term life insurance policies have no cash value and cannot be borrowed against.
  • Some term policies include optional riders that build cash value, and those policies may allow loans.
  • A policy loan is not free — you pay interest, and the unpaid balance reduces what your beneficiaries receive when you die.
  • Your insurance company can tell you in one phone call whether your policy allows borrowing and how much you could take out.

How cash value builds in a term policy with a rider

If you added a cash value rider to your term policy when you bought it, a small portion of your premium each month goes into a cash account instead of just paying for pure insurance protection. This account grows over time, similar to a savings account. The growth rate depends on the type of rider — some are fixed, and some are tied to market performance.

You can see your current cash value on your annual policy statement, or you can ask your insurance company to calculate it for you. The longer you have held the policy and the more premiums you have paid, the larger this value typically becomes. However, cash value grows slowly in the early years of a policy, so borrowing against a brand-new policy usually is not an option.

What happens when you take out a policy loan

When you borrow against your policy's cash value, the insurance company lends you money and charges you interest. The interest rate varies by company and by the type of policy, but it is typically between 5 and 8 percent per year. You do not have to make a set repayment schedule — you can repay the loan on your own timeline, or not at all.

However, any amount you do not repay stays borrowed. If you die before paying back the loan, your beneficiaries receive the death benefit minus the unpaid loan balance and any accrued interest. For example, if your policy pays $250,000 and you have an unpaid loan of $30,000 plus $2,000 in interest, your beneficiaries would receive $218,000.

If you stop paying premiums on the policy, the insurance company may use the cash value to cover the payments automatically. If the cash value runs out, your coverage ends. Some policies allow the loan balance to be paid from the remaining cash value, but this also reduces your death benefit.

The difference between a policy loan and surrendering your policy

A policy loan lets you borrow money while keeping your coverage in place. You still have life insurance protection, and your beneficiaries still receive a death benefit (minus the loan balance). You pay interest on what you borrow, but the policy stays active as long as you keep paying premiums.

If you surrender your policy instead, you cancel it entirely and receive the cash value as a lump sum. You no longer have any life insurance protection, and your beneficiaries receive nothing when you die. Surrendering is permanent — once you cancel, you cannot get that coverage back without reapplying and undergoing medical underwriting again.

A policy loan is usually the better choice if you want to keep your coverage. Surrendering makes sense only if you no longer need the insurance and want access to the cash value you have built up.

Other ways to access cash if you need money

If your term policy does not have cash value and you need money, borrowing against the policy is not an option. In that case, you might consider a personal loan from a bank or credit union, a line of credit, or a credit card advance. These options do not affect your life insurance coverage.

If you have a permanent life insurance policy (such as whole life or universal life) instead of term, those policies almost always have cash value and borrowing options. However, permanent policies cost significantly more in premiums than term policies.

Before you borrow against any policy or take out a loan elsewhere, think about whether you can afford the interest payments and whether reducing your death benefit (if you borrow from your policy) makes sense for your family's situation.

Frequently Asked Questions

What is the interest rate on a policy loan?

Interest rates vary by insurance company and policy type, typically ranging from 5 to 8 percent per year. Your policy documents or a call to your insurance company will show your exact rate. Unlike a bank loan, you do not have a fixed repayment schedule — you can repay whenever you want or not at all, though unpaid interest accrues.

Can I borrow from my term policy if I just bought it?

If your policy has a cash value rider, you technically can borrow, but there may be very little cash value in the first few years. Most policies require you to wait at least one to three years before borrowing, and the amount available grows as you pay more premiums. Call your insurance company to ask when you become may be able to access and how much you could borrow now.

What happens to my death benefit if I have an unpaid policy loan?

Your beneficiaries receive the death benefit minus the unpaid loan balance and any accrued interest. If you borrowed $20,000 against a $200,000 policy and never repaid it, your beneficiaries would receive approximately $180,000 (minus interest). This is why policy loans can be risky if you do not plan to repay them.

Can I borrow from my term policy if I stop paying premiums?

Once you stop paying premiums, your coverage ends and you cannot borrow. However, some policies allow the insurance company to automatically use your cash value to pay premiums for a limited time, which keeps the policy active. After that runs out, the policy lapses and borrowing is no longer possible.

Is a policy loan better than cashing out my policy?

A policy loan keeps your coverage active while you borrow money. Cashing out (surrendering) ends your coverage permanently and gives you the full cash value as a lump sum. A loan is better if you want to keep your death benefit; cashing out is better only if you no longer need the insurance and want all the money at once.