Can you take a loan against variable life insurance?

You can take out a loan on variable life insurance and use its cash value as collateral. However, there are some major risks associated with policy loans.

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Andrew HurstSenior Editor & Licensed Auto Insurance ExpertAndrew Hurst is a senior editor and a licensed auto insurance expert at Policygenius. His work has also been featured in The New York Times, The Wall Street Journal, Forbes, USA Today, NPR, Mic, Insurance Business Magazine, ValuePenguin, and Property Casualty 360.

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Antonio Ruiz-CamachoAntonio Ruiz-CamachoAssociate Content DirectorAntonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.

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Variable life insurance is a type of permanent life insurance. Its cash value growth is tied to a series of sub-accounts that earn interest at different rates. Like other permanent policies, it’s possible to take a loan out against variable life insurance after your cash value has grown to a certain amount set by your insurance company.

Life insurance terms you should know
  • Beneficiaries: The people you name on your life insurance policy to receive the lump sum of money — also known as the death benefit — when you die.

  • Cash value: The portion of a permanent life insurance policy’s monetary value that grows tax-deferred over the life of the policy.

  • Death benefit: The amount of money the life insurance company will pay your beneficiaries when you die.

  • Face amount: The dollar amount, or death benefit, your beneficiaries receive if you die while your life insurance policy is active.

  • Insured: The person who is covered by the insurance policy.

  • Policy: The legal document that includes the terms and conditions of your life insurance contract.

  • Policyholder: The person who owns an insurance policy. Usually, this is the same person as the insured.

  • Permanent life insurance: A type of life insurance that lasts for the rest of your life and usually includes a cash value account.

  • Premium: The amount you pay your insurance company to keep your coverage active. Premiums are typically paid monthly or annually.

  • Riders: Add-ons to a life insurance policy that provide more robust coverage, sometimes for an extra cost.

  • Term life insurance: A life insurance policy that lasts for a set number of years before it expires. If you die before the term is up, your beneficiaries receive a death benefit.

  • Underwriting: The process where an insurance company evaluates the risk of insuring you and determines your final rate.

What is a variable life insurance loan?

Variable life insurance, like all permanent life insurance, has two parts: a death benefit and a cash value account that earns tax-deferred interest. A variable life insurance loan is a loan that your insurance company extends to you using your cash value as collateral.

Your insurance company charges you interest like any other lender, but repayment for life insurance loans is much more flexible than for traditional loans. How much you can borrow from your life insurance policy depends on your cash value amount. 

“Typically, permanent life insurance policies allow cash value withdrawal up to a certain amount depending on the size of the overall cash balance (up to about 95%),” says Anthony He, former insurance agent and disability insurance operations manager at Policygenius.

Learn more about life insurance loans

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Pros of a variable life insurance loan

Taking a loan against the cash value of a variable life insurance policy has three main advantages over a traditional loan.

  1. Insurers (usually) charge a lower interest rate

  2. The loan is tax-free

  3. You can get the loan faster

There are fewer credit qualifications for life insurance loans, so you won’t get turned away like you might for a traditional loan. While you technically don’t have to pay the loan back, we don’t recommend skipping repayments because you’ll put your beneficiaries at risk of losing some or all of the death benefit.

Cons of a variable life insurance loan

Permanent life insurance policies are significantly more expensive than comparable term life policies. Whether you’re taking a loan against a variable life insurance policy or any other permanent life policy, it’s important to understand your options.

  • If your loan amount becomes higher than your cash value, your policy will lapse.

  • Loans are tax-free, but the interest is taxed if you use dividends to make payments.

  • The option to take out a loan isn’t guaranteed.

  • Unpaid loans are deducted from your beneficiaries’ payout when you die.

Learn more about the difference between term and whole life insurance

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How to take out a variable life insurance loan

If you have the cash value built up, taking out a loan against your variable life insurance policy can be an easy and smart financial move in certain circumstances.

Before you do so, talk to a licensed insurance agent or financial advisor. A life insurance loan has unique strengths, but also unique risks. If you decide to take the loan, talk to your insurance company about the next steps.

Author

Andrew Hurst is a senior editor and a licensed auto insurance expert at Policygenius. His work has also been featured in The New York Times, The Wall Street Journal, Forbes, USA Today, NPR, Mic, Insurance Business Magazine, ValuePenguin, and Property Casualty 360.

Editor

Antonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.

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