Can I borrow from my life insurance policy?

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Dear Insurance Adviser,
I have a life insurance policy and would like to know: Can I borrow money off it?
— Shaking the Trees

Dear Shaking,
There are basically two types of life insurance: term life insurance, which pays off only if you die within the policy term; and permanent, aka whole life, insurance, which has you paying considerably more per year in the early years so that your premium stays level in your older and more high-risk years.

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What you overpay in the early years is set aside and referred to as “cash value.” In the first 10 to 15 years that you have a whole life policy, the insurance company is allowed to assess “surrender charges” to recoup its sales commissions and related costs. The difference between the cash value and the surrender charges is what is known as the “surrender value.” That’s usually the amount you can borrow from the policy — also known as the “loan value.”

You asked the question, “Can I borrow against my life insurance policy?” The answer is “yes,” though only if it’s a whole life policy with cash values and only up to the amount of the surrender or loan value.

One caution: Whatever amount you borrow from the life insurance policy reduces the amount your beneficiaries will receive when you die. So try to get on a repayment plan to put the money back as soon as you can. At a minimum, you’ll have to pay interest on the loan annually.

Happy borrowing!

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