When most people think about life insurance, they think about the death benefit. A financial safety net that protects loved ones when you’re gone. But if you own a permanent life insurance policy, there may be another layer of value quietly growing in the background, and one you can access while you’re still alive.
That added value is called cash value, and for many policyholders, it becomes a source of financial flexibility in retirement or during times of need. You might be surprised to learn that it’s even possible to borrow against your policy, using that accumulated cash to cover personal expenses, emergencies, or strategic investments.
What Is Cash Value in Life Insurance?
Cash value is a feature of permanent life insurance policies, such as whole life or universal life insurance. Unlike term life insurance – which only provides a death benefit for a set period – permanent policies come with a built-in savings component. This cash value grows over time, usually on a tax-deferred basis.
Each time you pay your premium, a portion goes toward the death benefit, another part covers administrative costs, and the remainder is funnelled into the cash value account. Depending on your policy type, that account may earn interest or investment returns.
The longer you keep the policy active, the more that cash value grows. And once it reaches a certain level, you may be able to borrow from it – essentially using your policy as collateral.
How Borrowing Works
Borrowing from your life insurance policy is typically done through a policy loan. This is not the same as withdrawing money outright. When you borrow, you’re taking a loan from the insurance company using your policy’s cash value as security.
Here’s how it generally works:
- Loan Approval is usually automatic as long as your policy has enough cash value.
-
You Choose the Amount within a limit set by the insurer, typically up to 90 percent of the cash value.
-
No Credit Check is required, because you’re borrowing against your own asset.
-
Interest Applies on the loan amount. Rates are typically lower than unsecured loans or credit cards.
-
Repayment is Flexible, but unpaid loans and interest are deducted from your policy’s death benefit if not paid back.
This can be especially useful in retirement when you’re looking to access funds without triggering tax consequences or selling other investments.
When Borrowing Makes Sense
People borrow against their life insurance for a variety of reasons. Here are a few examples where this strategy might be helpful:
- Emergency Expenses like medical bills or home repairs
-
Covering Gaps in Retirement Income
-
Funding a Child’s Education
-
Starting or Expanding a Business
-
Bridging Financial Gaps Without Touching Investments
Since loans from your policy aren’t considered taxable income, they won’t impact government benefits like Old Age Security (OAS). That makes them appealing for seniors trying to manage income thresholds and preserve access to public programs.
Things to Consider Before Borrowing
While borrowing from your life insurance policy can be a smart financial move in some situations, it’s not without risk.
First, any unpaid loan balance, plus interest, will reduce the death benefit paid to your beneficiaries. That means if the loan isn’t repaid in your lifetime, your loved ones will receive less than expected.
Second, borrowing too much can jeopardize the policy itself. If the loan exceeds the cash value and interest continues to build, your policy could lapse, resulting in the loss of coverage and possible tax consequences.
And finally, not all policies accumulate enough cash value quickly. It may take years before borrowing becomes a realistic option.
For these reasons, it’s important to work with your insurance broker or financial advisor to assess whether borrowing from your policy aligns with your goals, and what repayment plan makes the most sense.
_
A life insurance policy might be more than a protective tool for your loved ones – it could also be a flexible financial resource for you. If you have a permanent policy, understanding how and when to access the cash value can help you unlock new possibilities as your needs evolve.
Before tapping into your policy, make sure you’ve explored the impact on your long-term plan and reviewed the specifics with a trusted professional.
Have questions about your current policy or want to learn more about permanent life insurance with cash value? Our team is here to help. We’ll walk you through your options and make sure your coverage works as hard as you do – both now and in the future. Reach out today and let’s start the conversation!
