Can You Borrow Against a Term Life Insurance Policy?

Many people wonder whether they can borrow money from their term life insurance policy. While this type of policy provides affordable coverage, it’s not designed to generate cash value or function as a borrowing tool. 

At the Rene Farias Agency, we often guide clients through the differences between term and permanent life insurance. Knowing how each policy works ensures you choose coverage that fits both your protection needs and financial flexibility. 

In this article, we’ll explain why term life insurance can’t be used for loans, how cash value works in other types of coverage, and what alternatives exist if you need access to funds. You’ll also learn common misconceptions and key financial considerations before making any borrowing decisions.

Understanding Term Life Insurance

Term life insurance is a straightforward type of coverage designed to protect your loved ones for a specific time. It offers affordable protection but does not include savings or investment features.

You pay premiums for the coverage period, and if something happens during that time, your beneficiaries receive the death benefit.

How Term Life Insurance Works

Term life insurance provides coverage for a set number of years, usually 10, 20, or 30 years. You pay regular premiums to keep the policy active. If you pass away during the term, the policy pays a death benefit to your beneficiaries. If you outlive the term, the coverage ends unless you renew or convert it. Term policies do not build any cash value. That means you cannot borrow against your policy or use it as a savings tool.

Features of Term Life Insurance

Term life insurance is known for being affordable compared to other types. It offers:

• Fixed premiums that are often lower than permanent policies

• A clear death benefit amount set at purchase

• No cash value or investment component

• Coverage for a specific period rather than a lifetime

Because of these features, term life works well if you want temporary protection—like covering a mortgage or providing for children until they become independent.

Differences Between Term and Permanent Life Insurance

The main difference is that term life insurance lasts for a limited time and doesn’t build cash value. Permanent life insurance, like whole or universal life, provides lifelong coverage and accumulates cash value, which you can borrow against.

Here’s a quick comparison:

Feature	Term Life Insurance	Permanent Life Insurance
Coverage Length	Fixed term (10-30 yrs)	Lifetime
Cash Value	No	Yes
Premiums	Lower and fixed	Higher, may increase
Borrowing Money	Not possible	Possible from cash value

This means you cannot borrow money against a term policy because it has no cash value to use as collateral. Permanent life insurance allows loans, using your cash value as a source.

Can You Borrow Against a Term Life Insurance Policy?

Term life insurance does not build cash value, which limits your ability to borrow money from it. To understand why, you need to know how cash value works and what options exist for using term life insurance as a resource.

Cash Value in Life Insurance Policies

Cash value is a saving feature that grows inside some life insurance policies over time. It acts like a personal savings account connected to your policy. You can access this cash value through loans or withdrawals. Permanent policies, such as whole life or universal life, include cash value.

This money grows tax-deferred and can be borrowed against with usually low interest rates. Term life insurance policies do not build cash value because they only offer coverage for a fixed number of years. This means there is no fund to borrow from.

Borrowing Options with Term Life Insurance

Since term life insurance lacks cash value, you cannot borrow money directly from it. The coverage only pays a death benefit if you pass away during the policy term. If you need cash, you must look for other sources. 

Some people choose to convert term life to a permanent policy to gain cash value benefits. Another option is to take out a personal loan or use a home equity line of credit, but these come with credit checks and repayment terms, unlike life insurance loans.

Policy Loans and Term Life Insurance

Policy loans are only available on permanent life insurance policies with cash value. When you borrow against your policy, you borrow from yourself, repaying with interest back into your policy’s cash value.

This option is not available with term life insurance because it does not hold cash value. If you have a term life policy, borrowing is not an option.

You would need to explore other types of loans or convert your policy to a permanent one to access loan features in the future. Always review your policy details and speak with your agent to confirm what your coverage allows.

Alternatives to Borrowing From Term Life Insurance

If you hold a term life insurance policy, you cannot borrow cash value because term policies don’t build that kind of savings. However, there are ways to access funds or adjust your coverage that might fit your needs better.

Permanent Life Insurance Policy Loans

Permanent life insurance policies, like whole or universal life, build cash value over time. You can borrow from this cash value at a low interest rate, usually without a credit check. The loan does reduce the policy’s death benefit until it is repaid. Borrowing this way can be flexible.

You set your repayment schedule, and the loan amount plus interest is subtracted from your payout if you don’t repay it. This helps you access money quickly without selling investments or losing coverage.

Keep in mind that if you don’t repay the loan, it can reduce the protection your policy provides to your family. Also, interest on loans may affect your cash value growth.

Utilizing Policy Riders

Some term life policies offer riders that add extra benefits or cash access features. For example, a living benefits rider lets you use part of the death benefit early if you become seriously ill. This option can provide financial help during emergencies. 

Riders typically involve additional costs but give you alternatives without taking out a loan that must be repaid. 

They may also preserve your insurance coverage better than borrowing would. Check your policy details to see if riders are available. They are a practical option to increase flexibility without changing your term life policy.

How Living Benefits Riders Provide Added Flexibility

Living benefits riders can make term life insurance more adaptable to life’s unexpected events. According to the National Association of Insurance Commissioners (NAIC), these riders allow policyholders to access part of the death benefit early in cases of critical or terminal illness. 

This helps cover medical costs or living expenses without waiting for a claim payout. While not a substitute for loans, riders provide valuable financial support during emergencies and can add peace of mind to your coverage.

Surrendering a Term Policy

If you no longer need your term policy or want cash immediately, you might consider surrendering it, but only if your policy offers a return of premium. Most term policies don’t provide cash value, so surrender will not yield any money back.

However, some return-of-premium (ROP) term plans refund a portion of the premiums paid if you cancel before the term ends. Surrendering a policy means losing your coverage.

You would need to buy new insurance if you still want protection, which may be costlier as you get older. Before surrendering, weigh the potential cash available against the long-term insurance benefit you would lose.

Considerations When Exploring Borrowing Options

When thinking about borrowing against life insurance, you need to understand how it affects your policy, the financial costs involved, and how this option compares to other loan choices. It’s important to assess these areas carefully before making a move with your life insurance.

Impacts on Death Benefit

If you borrow against a life insurance policy that has cash value, the loan reduces the death benefit available to your beneficiaries. This means your loved ones may receive less money if you pass away before repaying the loan.

Any unpaid loan balance, plus interest, will be deducted from the total payout. Term life insurance usually has no cash value, so you cannot borrow against it.

Only permanent policies like whole or universal life build cash value that supports borrowing. Keep in mind, borrowing can lower the protection you think you have, so it is vital to check your policy specifics and how loans affect the death benefit.

Financial Implications

Borrowing from your life insurance policy usually involves paying interest on the loan. However, interest rates tend to be lower than other loan types. You don’t need to go through credit checks or strict repayment schedules. 

But unpaid loans and interest grow over time, reducing both cash value and death benefit. If the loan and interest exceed the cash value, your policy might lapse. This loss can leave you without insurance and could trigger taxable income.

You should track the loan balance carefully and plan repayments or risk losing both coverage and value.

Comparison With Other Loan Sources

Life insurance loans offer quick access to cash and fewer credit requirements than traditional lenders. This can be helpful if you need emergency funds or want to avoid a complicated process.

However, unlike personal loans or credit cards, borrowing affects your policy’s benefits and could risk your coverage. Other loans might come with fixed repayment terms and could build credit history.

They may also provide larger amounts than your policy’s cash value. Compare your borrowing needs, costs, and risks before deciding which source fits best with your financial goals.

Common Misconceptions About Borrowing From Term Life Insurance

Many people confuse term life insurance with other types of policies that build cash value. Some believe you can take loans from term policies, but that is not true. Understanding these differences can help you make better decisions about your coverage.

Mistaking Term for Whole Life

You might think term life insurance works like whole life insurance because both provide financial protection. However, term life only offers coverage for a set period and does not build cash value.

Whole life insurance, on the other hand, combines coverage with a savings component you can borrow against. If you want the option to borrow money, term life is not suitable.

Its purpose is pure protection, without any loan or cash value features. Knowing this helps you avoid expecting benefits that term life cannot provide.

Belief in Policy Cash Value Availability

Some assume that all life insurance policies have cash value that can be borrowed against. Term life policies do not accumulate cash value because premiums only cover the death benefit.

Without cash value, there is no reserve to use for policy loans. Permanent life insurance policies, like whole or universal life, build cash value over time, allowing you to borrow against it. With term life, you cannot access money this way, so you’ll need other borrowing options if you require cash.

Comparison Between Term and Permanent Life Insurance

You cannot borrow against a term life insurance policy because it does not build cash value. Term policies provide protection only for a set period and do not offer money to borrow or use while you are alive.

If you want to borrow money using life insurance, consider a permanent policy, such as whole life or universal life. These policies accumulate cash value, which you can borrow against if needed.

Borrowing against your policy reduces the death benefit until the loan is repaid. It may also result in fees or interest being applied.

Term Life Insurance	Permanent Life Insurance
No cash value	Builds cash value over time
No loans available	Policy loans allowed
Lower premiums	Higher premiums but more benefits

Choosing the right insurance depends on your financial goals. Always review your options with a trusted advisor before making decisions.

Choosing the Right Life Insurance for Your Needs

Term life insurance provides straightforward, affordable protection but cannot be used for loans or cash withdrawals. It’s designed for temporary coverage, giving your family financial security for a set period. 

If you’re looking for flexibility or access to cash value, exploring permanent life insurance may be a better fit. Rene Farias Agency helps clients understand how different life insurance options work. This way, you can make confident decisions about protection and financial planning. 

If you’re ready to review your current policy or explore flexible alternatives, book a call today. Together, we’ll design a plan that keeps you covered while meeting your long-term financial goals.

Frequently Asked Questions

Can You Borrow Money From a Term Life Insurance Policy?

No, you cannot borrow from a term life insurance policy because it does not build cash value. Term life insurance is designed for pure protection over a specific period, not as a savings or investment tool.

Why Doesn’t Term Life Insurance Build Cash Value?

Term life insurance premiums only cover the cost of providing a death benefit for a limited time. There is no savings component built into the policy, so no funds accumulate to borrow against.

Can You Convert a Term Life Policy to One That Allows Borrowing?

Yes, some term policies include a conversion option that lets you switch to a permanent policy before your term ends. Once converted, the new policy can build cash value, which you may later borrow against.

What Are Alternatives If You Need to Borrow Cash?

If you need access to cash, you can consider a personal loan, a home equity line of credit, or converting to a permanent life insurance policy. These options provide financial flexibility without affecting your term coverage.

What Happens If You Borrow From a Life Insurance Policy?

When you borrow from a permanent life policy, the outstanding loan and interest reduce the death benefit until repayment. Unpaid balances can also cause the policy to lapse or reduce the payout to beneficiaries.