You cannot borrow against term life insurance because it has no cash value
Term life insurance is pure protection: you pay a monthly premium, and if you die during the term, your beneficiaries receive the death benefit. The policy builds no savings component, no investment account, and no cash value that accumulates over time. Because there is nothing stored in the policy, there is nothing to borrow against.
This is the core difference between term and permanent life insurance. Permanent policies — whole life, universal life, and variable universal life — do build cash value as you pay premiums. That cash value is what makes borrowing possible. Term policies are designed to be affordable protection for a set period, not a financial asset you can tap into.
If you need to borrow money and you own a term policy, you have other options, but borrowing from the policy itself is not one of them.
Key Takeaways
- Term life insurance has no cash value, so you cannot borrow against it under any circumstances.
- Permanent life insurance policies (whole life, universal life) do build cash value and allow policy loans, but term does not.
- If you need cash and own only a term policy, you can surrender it for nothing, convert it to permanent insurance, or explore other borrowing options like personal loans or home equity lines of credit.
- Borrowing against a permanent policy reduces the death benefit your beneficiaries receive unless you repay the loan.
Why term policies have no borrowing option
Term life insurance costs less than permanent insurance because the insurance company knows it will likely never pay a claim. Most term policies expire before the policyholder dies. The low premium reflects that risk profile — the company is betting on not paying out, so they do not need to collect enough money to build a reserve in your name.
Permanent insurance, by contrast, is designed to last your entire life. The premiums are higher because the company will almost certainly pay a death benefit eventually. That higher premium allows the company to set aside a portion of each payment as cash value — money that belongs to you and that you can borrow against, withdraw, or use to pay premiums if you stop making payments.
Term policies are straightforward: premiums go to the insurance company to cover the risk of your death during that term. There is no side account, no investment component, and no equity building. Once the term ends, the policy expires and you have nothing left unless you renew or convert it.
What happens if you need money and own a term policy
If you own a term policy and need cash, you have three realistic paths. The first is to surrender the policy — cancel it and receive nothing. Term policies have no cash value, so cancellation pays you zero. This is rarely the right choice unless you cannot afford the premiums and need to stop paying.
The second option is to convert the policy to permanent insurance before the term ends. Most term policies include a conversion rider that lets you switch to whole life or universal life without a medical exam, even if your health has changed. You will pay higher premiums going forward, but the new permanent policy will build cash value that you can borrow against. Conversion is only available during the term — once the policy expires, you lose this option.
The third path is to borrow money outside the policy. You can take out a personal loan from a bank or credit union, use a home equity line of credit if you own a home, or explore other lending options. These routes do not involve your insurance policy at all, but they may carry higher interest rates or require collateral.
How borrowing works if you convert to permanent insurance
If you convert your term policy to permanent insurance, the new policy will begin building cash value immediately. After a year or two, depending on the policy and the insurance company, you may be able to borrow against that cash value.
A policy loan works like this: you request a loan from the insurance company using your cash value as collateral. The company lends you money at an interest rate set in your policy (typically 5 to 8 percent, though this varies). You do not have to repay the loan on a set schedule — you can repay it whenever you want, or not at all. However, any unpaid loan balance reduces the death benefit your beneficiaries receive. If you die with a $10,000 loan outstanding, your beneficiaries get $10,000 less than the policy promises.
You can also surrender part of the cash value — withdraw money directly from the policy without borrowing. This is simpler than a loan because you do not owe anything back, but it permanently reduces your death benefit and may trigger tax consequences if the withdrawal exceeds what you paid in premiums.
The cost of converting to permanent insurance
Converting a term policy to permanent insurance is not free. Your new premiums will be significantly higher — often two to three times what you were paying for term. The exact increase depends on your age, health, and the type of permanent policy you choose.
Conversion is valuable because you avoid a medical exam and the insurance company cannot deny you based on health changes since you bought the term policy. But you are paying for that may provide through higher premiums. If you are young and healthy, you might get a better rate by applying for a new permanent policy from scratch. If your health has declined, conversion is usually the only way to get permanent insurance without undergoing medical review.
Before you convert, compare the cost of higher premiums against the cost of borrowing money another way. A personal loan at 8 percent interest might be cheaper than paying permanent insurance premiums for years if you only need to borrow once.
Why you should not count on borrowing from a term policy
If you are buying term life insurance partly because you think you might borrow against it someday, reconsider. Term policies are not designed for that purpose, and converting to permanent insurance to access borrowing is expensive. The better approach is to buy term insurance for its actual purpose — protecting your family if you die — and to handle borrowing needs through other means.
If you know you will need access to cash value, permanent insurance makes sense from the start. But permanent insurance is much more expensive, and most people are better served by term insurance paired with a separate emergency fund or line of credit.
Frequently Asked Questions
Can I borrow money using my term life insurance as collateral?
No. Term life insurance has no cash value, so it cannot serve as collateral for a loan. However, some lenders may consider the death benefit as an asset when evaluating your creditworthiness for an unrelated personal loan, though this is uncommon.
What if I convert my term policy to whole life — how long before I can borrow?
Cash value builds from day one of a permanent policy, but most insurance companies do not allow loans until the policy has been in force for one to two years. Check your policy documents or call your insurance company to confirm the exact waiting period.
If I take a loan against my permanent policy and die before repaying it, what happens?
The unpaid loan balance is subtracted from the death benefit. If your policy has a $500,000 death benefit and you have a $50,000 loan outstanding, your beneficiaries receive $450,000. The loan does not disqualify the claim — it simply reduces the payout.
Is it cheaper to borrow from a permanent policy or take out a personal loan?
It depends on the interest rates and how long you need the money. Policy loans typically charge 5 to 8 percent interest with no fixed repayment schedule, while personal loans often range from 6 to 36 percent depending on your credit. However, permanent insurance premiums are much higher than term, so the total cost of converting to access borrowing may exceed the cost of a personal loan.
Can I get a term policy with a cash value option?
No. Term life insurance, by definition, has no cash value. If you want a policy with cash value and borrowing options, you need permanent insurance — whole life, universal life, or variable universal life.