Borrowing from your life insurance is a method where you tap into the cash value of a whole life or universal life insurance policy.
This can be an effective way to finance real estate deals, as the loan is secured by your policy’s cash value rather than external collateral like property.
Let’s explore how it works.
Eligibility/Requirements
To borrow against your life insurance, you must have a permanent life insurance policy, such as whole life or universal life, with sufficient cash value. Term life policies do not accumulate cash value, so you can’t borrow against them.
The lender (often the insurance company) will typically allow you to borrow up to 90% of the cash value, depending on the policy.
Owner-Occupancy Requirement
There is no owner-occupancy requirement when borrowing from your life insurance.
You’re simply borrowing against your own policy, so you can use the funds for any purpose, including real estate investments.
Down Payment
There is no traditional down payment required when borrowing from your life insurance.
Instead, you’re borrowing from your own policy’s cash value, which serves as the collateral for the loan.
Loan-to-Value (LTV) Ratio
The LTV ratio for borrowing against your life insurance is based on the cash value of your policy. Most insurance companies allow you to borrow up to 90% of your policy’s cash value.
The more cash value you’ve accumulated, the more you can borrow.
Interest Rates
Interest rates for borrowing against your life insurance are typically lower than traditional loans. The rates, set by the insurance company, often range from 4-8%, depending on the company and your specific policy.
There are several ways these policies can be structured but typically you’re paying the insurance company interest that they’re earning as profit and you’re still earning the money on the policy. The amount you’re paying in interest may be—and is likely to be—higher than what you’re earning on your policy.
While you’re effectively paying yourself some of the interest because you’re earning money on the policy, the exact percentage and structure can vary. It’s advisable to discuss the specifics with your insurance provider to understand how much of the interest you’ll recoup versus how much goes to the company.
I’ve not found an insurance sales professionals could truly explain what is really happening. They know how to sell the policy, but they’ve not satisfactorily explained the actual math to me. It is possible I’m missing something in their explanations, but I’m usually pretty good at understanding this type of material.
Amortization Period
There is no set amortization period for loans from life insurance policies. The loan doesn’t have a repayment schedule, and you can choose to pay it back at any time. However, interest will continue to accrue until the loan is repaid, and unpaid loans will reduce the death benefit of your policy.
Private Mortgage Insurance (PMI)
PMI is not a factor when borrowing from life insurance. Since you’re borrowing against your own cash value, there’s no need for mortgage insurance.
Loan Limits
The loan limits are based on the available cash value in your policy. You can typically borrow up to 90% of the cash value, which serves as the maximum loan amount. This makes the loan limits dependent on how much cash you’ve built up in your policy over time.
Number of Loans Allowed
There is no limit to the number of loans you can take from your life insurance policy, as long as you have available cash value. You can take out multiple loans if needed, though the total amount borrowed cannot exceed the cash value.
Seller Concessions
Seller concessions do not apply to loans from your life insurance policy. You are using your own funds from the policy’s cash value, so this is entirely separate from seller contributions.
Waiting Period After Major Financial Events
There is no formal waiting period for borrowing from your life insurance policy. As long as your policy has accumulated enough cash value, you can borrow against it at any time, regardless of past financial events like bankruptcy or foreclosure.
Refinancing Rules
Refinancing does not apply to life insurance loans since you’re borrowing against your policy’s cash value:
- No Traditional Refinancing – There’s no need to refinance a loan from your life insurance, as it’s a flexible, self-funded loan with no fixed terms or payment schedule.
- Recast – Recasting isn’t applicable because you’re borrowing against your own cash value, and the terms remain flexible as long as the loan is outstanding.
Property Types Eligible
The loan is not tied to a specific property. Since you’re borrowing from your life insurance, you can use the funds to invest in any type of property—residential, commercial, or otherwise. There are no restrictions on property types.
Special Loan Features
Borrowing from life insurance comes with a few unique features:
- Flexible Repayment – You can choose to repay the loan at any time, or not at all. The loan is secured by your policy’s cash value, and any unpaid balance is deducted from the policy’s death benefit.
- Self-Funded – Since the loan comes from your own life insurance policy, you’re effectively borrowing from yourself, which offers a level of control and flexibility.
- Buying In Entities – Since the loan is not tied to the purchase of a specific property, you can use the funds to buy real estate in the name of an entity like an LLC if you choose.
Approval and Underwriting Process
There’s no formal underwriting process when borrowing from your life insurance policy. As long as you have sufficient cash value in the policy, you’re free to borrow against it without going through the traditional credit checks or loan approvals typical of conventional financing.
Risks and Considerations
There are a few important risks to consider when borrowing against your life insurance:
- Interest Accrual – While the interest rates are lower, the loan continues to accrue interest as long as it’s unpaid, reducing the overall value of your policy.
- Impact on Death Benefit – If the loan is not repaid, it will reduce the death benefit your beneficiaries receive. This could impact your long-term financial planning.