Borrowing From a Life Insurance Policy? Questions to Ask First

Confirm the policy has a loan feature

Some permanent life insurance policies may allow a loan against available cash value; term coverage generally does not build cash value for that purpose. Ask the insurer for a current in-force statement showing cash value, surrender value, existing loans, and any restrictions. The amount available to borrow is determined by the actual contract, not simply by the death benefit shown on the declarations page.

Request a written illustration of the effects

Ask how interest is charged, whether the rate can change, and what happens if interest is not paid. Request an illustration showing the loan balance and projected policy values under more than one assumption. A loan and accrued interest can reduce the amount payable at death and may increase the chance that a policy lapses. Do not treat a projected value as guaranteed.

Discuss tax and lapse questions with qualified advisors

Tax treatment can depend on the contract, its history, and whether it is classified as a modified endowment contract. A lapse or surrender with a loan outstanding may create tax consequences. Ask the insurer for policy-specific figures and discuss tax questions with a qualified tax advisor before acting. Jennifer Dammeier Agency can help organize insurance questions, but this article is not tax advice.

Make a repayment and review plan

If you proceed, save the loan agreement, interest notices, payment confirmations, and updated policy statements. Decide how you will monitor the balance and request an updated illustration if dividends, premiums, or payments differ from the original plan. Our annual life statement guide provides a broader review checklist. Browse the Life Insurance archive and review the contract with your agent before making a decision.

The Jennifer Dammeier Agency serves Bargersville and nearby Johnson County communities. Contact Jennifer Dammeier American Family Insurance with your current policy and details of your situation to discuss available options.

This article provides general educational information, not individualized insurance, legal, or tax advice. Coverage, availability, limits, exclusions, and claims depend on the policy and insurer. Review your documents with a licensed agent and consult other qualified advisors as needed.