We receive many calls and comments asking how to use whole life insurance as collateral for a loan. If this interests you, keep reading.

If you want to start a business or borrow money for another purpose, you could get help from an unexpected source: your life insurance policy.

When it comes to taking out a loan using your life insurance policy as collateral, it’s important to understand the difference between borrowing money from your policy and using your policy as collateral for a loan.

Borrowing money from your life insurance policy is an option if you have a permanent life insurance policy, such as whole life insurance, that has an accumulated cash value.

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If you’re considering taking out a life insurance loan, there are some potential risks to be aware of. If you don’t repay the loan, it will reduce the death benefit paid to your beneficiaries. Additionally, if you use the cash value of the policy to offset your premium costs, higher premiums may result if you don’t repay the loan.

If the death benefit of your whole life policy is not the primary focus of the policy, then by all means, take advantage of your cash value account as collateral for a loan rather than putting up other assets that you cannot afford to forfeit.


How to Borrow Against Your Whole Life Insurance Policy


The best part of your whole life insurance policy is the cash component built into the policy. The cash in your policy is the result of premiums that are diverted into your cash account.

This premium accumulates over time and grows as the result of guaranteed interest credited to your cash account along with the annual dividends paid by the insurer. Your policy must be a participating policy in order to earn dividends from the insurer.

The bottom line is that these funds are available to you whenever you want to use them as collateral for loans from the insurer or to be assigned as collateral to a third-party lender.

Generally, there are four options available to you when borrowing from your whole life insurance:


Use Your Cash Account as Collateral for a Loan

If you’re looking for a loan, consider using your life insurance policy as collateral. The cash value of the policy can be used as security for the loan, and the lender knows that if you can’t make the payments, you can always cancel the policy and use the cash value to repay the debt.

Depending on the terms of your life insurance policy, you may have to accumulate a certain amount of money in the cash account before you can borrow against it. If you are unable to repay the loan, the lender may seek repayment from the policy’s cash value, which could reduce the death benefits paid to your beneficiaries.


Ask for a Policy Loan

If you’re looking for a way to get cash but don’t want to take out a loan from a bank or other lender, consider using your life insurance policy as collateral. This method is similar to using your home or car as collateral for a loan, except in this case the lender is the insurance company.

The benefit of this arrangement is that you can repay the loan, so your death benefit won’t be reduced and your cash value account will continue to earn interest and dividend payments which will offset the interest the company will charge for the policy loan.


Take a Withdrawal from Your Policy’s Cash Value

Some life insurance policies allow you to withdraw cash from the policy, for a fee. You might use this option if you need to make a large purchase and are low on funds. There may be penalties (surrender charges) for early withdrawal of the cash, depending on the terms in your policy.

Once you withdraw from your policy, the loan is final and cannot be repaid. This type of loan will impact your death benefit, so it should only be your option if you’re short on cash. Depending on how much you withdraw, it could significantly decrease or even wipe out your death benefit altogether. 

What are the Tax Consequences for Each Type of Loan or Withdrawal?

There are a few things that regulatory bodies take into consideration when taxes on loans come into play. One of those things is the policy’s adjusted cost base (ACB). The ACB for a life insurance policy is the policyholder’s cost of keeping up with the policy, which includes all costs except for the net cost of the insurance itself.

As an example, if you have a whole life policy with an annual premium of $6,000 this may break down into $1,800 for the actual cost of the life insurance, $3,500 for the cash value account, and $700 for policy maintenance. In this case, the ACB would be $4,200.

In any case, the tax liability for a policy loan will depend on how withdraw funds from your whole life insurance policy.

  • The policy used as collateral on a loan – no tax liability
  • Withdrawals – taxes are applied only to the amount that exceeds the ACB.
  • Policy Loan from the insurer – only the amount that exceeds the ACB

Collateralized Cash Value Comparison

AspectPolicy LoanPolicy WithdrawalCollateral Assignment
% of Access to Cash ValueTypically 90%100% minus surrender charge50 to 90%
Tax LiabilityOnly if the loan is more than the ACB (entire amount of loan is taxed.Only the amount over the policy ACBTax-exempt
Restriction of use of funds?NoneNoneNone
Use of Credit ScoreNoNo Yes
Impact on Death BenefitYes, if loan is not repaidYesNo

The Bottom Line

If you are looking for a way to access the cash value of your life insurance policy, a collateral assignment may be a good option. With this type of loan, you can use your life insurance policy as collateral to secure a loan. This can be a great alternative to traditional loans that require you to put up personal assets as collateral.

Take a few minutes out of your day to consult with an advisor at Structured Wealth Strategies to learn how to safely leverage the cash value account attached to your Whole Life insurance policy.

Our team will be happy to discuss your financial needs and determine which method of accessing the cash in your policy that will work best for you.

Frequently Asked Questions

What kind of life insurance can be used as collateral?

In almost every case, a cash-value life insurance policy like whole life or universal life is used as collateral for a third party loan.

How much money can I borrow from my whole life insurance policy?

Most insurance companies will allow policyholders to borrow up to 90% of the policy’s cash value. Be aware, however, that there will be interest charged by the insurer for the loan.

Do I have to repay a policy loan?

You can elect to repay the loan or not repay it. If you should die with an outstanding loan, the balance of your own and any outstanding interest will be deducted from the death benefit.

What is collateral assignment of life insurance.

When you collateralize your whole life insurance policy, you are assigning the value of your life insurance to the lender in the event that you die while the loan is outstanding.

What types of loans do lenders require life insurance collateral for?

Typically, a lender will require a life insurance policy assignment for a business loan or a large personal loan when assets are not available to be used as collateral.

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