How to Apply for a Loan From an Insurance Policy

By Nolan Kido

Life insurance policies provide financial protection for your dependents after your death in exchange for upfront premiums. While life insurance is primarily used for estate planning, certain policies allow you to apply for a loan from your own insurance policy.

Determine if your insurance policy allows you to apply for a loan. There are two basic types of life insurance: term and whole life. In term insurance, you pay a premium in exchange for life insurance protection for a set amount of time. If nothing happens to you within that time period, the policy expires and you receive nothing from your premium payments. In whole life, you agree to pay a series of premium payments over time in exchange for a combination of successive term insurance policies and an accompanying investment account. With whole life insurance, if nothing happens to you during the period of life insurance coverage, you or your beneficiaries will receive the "cash value" of the policy. Whole life policies are significantly more expensive than term policies for equivalent amounts of insurance coverage, but most also allow you to apply for a loan from your policy.

Verify that you are eligible to apply for a loan from your whole life insurance policy. Contact your independent insurance agent or the insurer and ask about the process for applying for a loan. There are restrictions regarding the amount of a loan, repayment time frame and effect on your insurance coverage. Double-check that your loan will not significantly impair the amount of life insurance coverage you are receiving.

Contact your tax professional to understand the tax implications of taking a loan from your insurance policy. Your individual situation will vary, but there can be large financial penalties for taking a loan from your insurance policy. Your income, age, length of policy, amount of coverage and beneficiaries can also influence the tax consequences of an insurance policy loan.

Sign a policy loan agreement with your insurance company. Note the repayment terms and fees charged by the insurer. Be sure to make any required payment on time to avoid jeopardizing your life insurance coverage.

You may have a universal life insurance policy or a variable universal life insurance policy. These are adaptations of a whole life insurance policy and generally carry the same policy loan features.

Do not rely on your insurance company for an assessment of the tax implications of your loan. You must consult a tax professional to understand the consequences of a policy loan.

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