Page Reviewed / Updated - Jun. 2018
Death benefit loans are loans taken by a life insurance policyholder from their life insurance company. Loans are taken against the cash value of the policy, not against the death benefit amount. They have low interest rates and don’t have re-payment schedules. Borrowers choose to repay on their own schedule, or they may choose not to repay at all. Should they pass away without having repaid the loan, the outstanding amount (loan and interest) is deducted from their death benefit.
Death benefit loans are, more accurately, referred to as life insurance loans or policy loans.
An elderly individual borrowing money to help pay for their long-term care is unlikely to be in a position to re-pay a death benefit loan. Additionally, the loan comes with interest, which continues to grow if it isn’t repaid. Therefore, if the beneficiaries of the life insurance policy do not need the money, then the individual might be better served utilizing their life insurance policy's value in other ways.
One option is accelerated death benefits. These differ from death benefit loans in that they are not intended to be re-paid and therefore no interest is charged. A second option is to convert one’s insurance policy into an account to pay for long-term care services. This is called a Medicaid Life Settlement. This option ensures the policyholder maintains the possibility of eventually getting assistance from Medicaid should they run out of money for care.
Personal factors have very little to do with being eligible for a death benefit loan. One's age, health, veteran, or marital status, nor their geographic location or place of residence, nor credit score, has any impact on their eligibility. Instead, the qualifying factors surround the policy itself. Death benefit loans are only available with "whole life" or "universal life" policies, which are permanent life insurance plans that accrue cash value and do not expire. On the other hand, death benefit loans are not available with “term life” policies, which do not accrue cash value and do expire. Typically, one has to have held the policy for a minimum of three to five years before it has accrued a cash value against which the policyholder can borrow money. After that point, nearly all policyholders with the right type of insurance can receive a death benefit loan.
Death benefit loans are provided as a lump sum and borrowers can use the money for any purpose they choose, including in-home care, adult day care, assisted living, skilled nursing, or to modify their home to allow a frail elderly person to continue living at home.
Each life insurance policy is different, but most will allow the insured to borrow 90-100% of the cash value for a death benefit loan. This loan is tax free, up to the total amount one has paid in premiums. However, at the time of one’s death, any remaining balance will be taxed. The qualification process for death benefit loans is not complicated. Therefore, the time to receive the loan is fairly quick, typically within 30 days.
Interest rates for a death benefit loan are very low when compared to other types of loans. Some insurers may apply other fees.
Individuals wanting to borrow against their life insurance death benefit should contact their life insurance provider directly.