Let’s say you have a term life insurance policy and suddenly need some extra cash. You might wonder, “Can I borrow against my life insurance?” It’s a good question—and a common one. After all, life insurance is a financial asset, right?
Well, not all life insurance works the same way, and when it comes to term life insurance, things are pretty straightforward: you can’t borrow against it. But don’t worry—we’re going to break down exactly why that is, what your options are, and what you can do instead.
Let’s dive in.
What Is Term Life Insurance, Really?
Think of term life insurance like renting an apartment. You pay a set amount (your premium) every month for a fixed period—10, 20, or 30 years. If something happens to you during that time, your loved ones receive a lump sum of money (called a death benefit).
But when the term ends? That’s it. The policy expires, and unless you renew or convert it, there’s no payout, no refund, and no value left behind.
Now, here’s the important part: term life doesn’t build cash value. And that’s the main reason you can’t borrow against it.
Why Can’t You Borrow Against Term Life Insurance?
It comes down to this: you can’t borrow what isn’t there.
Some types of life insurance (we’ll get into those in a minute) include a savings component that grows over time—something called “cash value.” Term life doesn’t have that. It’s designed to be simple and affordable: pure protection, no bells and whistles.
So if you were hoping to tap into your term life policy for quick cash, it just won’t work. But hang tight—there are other ways to get what you need.
What Kind of Life Insurance Does Let You Borrow?
Alright, here’s where things get interesting. Some life insurance policies do let you borrow against them. These are usually called permanent life insurance policies. They’re more complex and often more expensive, but they come with that slow-growing cash value that you can tap into when needed.
Whole Life Insurance
This one’s the classic. It lasts your whole life, and part of your premium goes into a cash value account that earns interest over time.
You can borrow against that cash value—kind of like taking out a loan from yourself. There’s interest, but you don’t have to pay it back immediately. If you don’t repay it, it’ll just get deducted from the death benefit later.
Universal Life Insurance
This one’s more flexible. You can adjust your premiums and death benefit over time, and it also builds cash value—though usually not as predictably as whole life.
You can borrow from it, too, but you’ll want to keep an eye on how much you borrow and how long you take to repay. Otherwise, your policy might lapse.
Variable Life Insurance
This one lets you invest your cash value in different funds, similar to a 401(k) inside your life insurance. It offers potential for higher growth, but it also carries more risk.
You can borrow from it, but since the cash value depends on market performance, the amount available to borrow might change.
How Borrowing from Life Insurance Actually Works
Let’s say you have one of those permanent policies. Here’s what borrowing typically looks like:
- You’ve had the policy for a few years, and the cash value has grown.
- You contact your insurance company and request a loan.
- They let you borrow up to a certain percentage of the cash value.
- You get the money without paying taxes on it, as long as the policy stays active.
- Interest starts accruing on the loan.
- If you don’t repay the loan, it’s deducted from the death benefit.
It’s a convenient option in a pinch, but there are risks. If the loan and interest grow too large, your policy could lapse, and you could end up losing coverage or owing taxes on the unpaid amount.
What If You Only Have Term Life Insurance?
If you’ve got a term policy and need cash, here are a few things to consider:
Check If Your Policy Can Be Converted
Some term policies allow you to convert to a permanent policy—no new medical exam needed. This could give you access to a policy that builds cash value.
Premiums will be higher, but you’ll get lifelong coverage and the ability to borrow against the policy down the road.
Explore Other Financing Options
Since you can’t borrow from term life, you might look at:
- Personal loans from your bank or credit union
- Home equity loans or home equity lines of credit (HELOCs)
- 401(k) loans (but be cautious about tax penalties)
- Credit cards (only if you have a clear plan to repay)
- Cash-out refinancing if you have home equity
Talk to a Financial Advisor
A professional can help you figure out the smartest route—whether that’s converting your term policy, switching to a new one, or using another financial strategy.
Is Switching to a Policy with Cash Value a Good Idea?
It depends.
Permanent life insurance can be a good fit if:
- You want lifelong coverage
- You’re okay paying more each month
- You’re looking for a way to build savings over time
- You like the idea of borrowing against the policy later
But many people still prefer term life for its simplicity and lower cost. The “buy term and invest the rest” strategy—where you buy term life and put your extra money into investments like index funds—can often grow your wealth more effectively over the long run.
It really comes down to your goals, your budget, and how much flexibility you want.
Quick Recap
Can you borrow against term life insurance? No—you need a policy with cash value for that.
Can you borrow from other types of life insurance? Yes—whole life, universal life, and variable life policies allow it.
What are your options if you have term life and need money? You could convert your policy, or look into personal loans, home equity, or retirement accounts.
Should you switch to permanent life insurance? It depends on your goals, finances, and how important lifelong coverage and borrowing options are to you.
Final Thoughts
Term life insurance is a great tool. It’s affordable, easy to understand, and gives your family financial protection during your working years. But it’s not built for borrowing.
If you’re looking for something that grows in value and offers more financial flexibility, permanent life insurance might be worth considering. Just remember—it’s a bigger investment, and it’s not the right fit for everyone.
No matter what type of policy you have or are considering, make sure it fits into your bigger financial plan. Life insurance should work for you—not just after you’re gone, but while you’re living, too.
