Can You Borrow Against a Final Expense Policy?

Which Final Expense Policies Build Cash Value

Not every policy lets you borrow. Whether you can depends on the type of policy you own.

Final expense insurance is a form of whole life insurance. Whole life policies are built to last your whole life, and part of what you pay each month goes into a savings-like account called cash value. That cash value is the money you can later borrow against.

Term life insurance works differently. It covers you for a set number of years and then ends. Term policies do not build any cash value, so there is nothing to borrow.

Here is a simple way to see the difference:

One important note about burial insurance. There are two common kinds. A standard, health-based policy usually builds cash value like other whole life plans. A guaranteed issue policy, which accepts you without health questions, rarely builds much cash value at all. These plans are meant for people with serious health issues, so they trade cash value for easy approval.

Cash value also builds slowly, especially on small policies. Because final expense death benefits are often just $5,000 to $35,000, it can take several years before there is enough cash value to borrow. In the early years, most of your premium goes toward the cost of your coverage, not the savings account.

How a Policy Loan Works

A policy loan lets you borrow money from your own policy’s cash value. In simple terms, you are borrowing against your savings, and the policy itself acts as the collateral.

The process is usually easy. There is no credit check and no approval based on your income or job. You contact your insurance company, ask for the amount you want, and the funds are often sent within a few business days.

You can use the money for any reason. Many people borrow for an emergency, a medical bill, or an unexpected cost. The insurance company does not tell you how the money must be spent.

How Much You Can Borrow

You cannot usually borrow all of your cash value. Insurers hold back a small portion so the policy does not run out of money.

Most companies let you borrow up to about 90% of your cash value, though some set the limit closer to 75%. The exact cap depends on your insurer and your policy.

Here is an example of how the math works on a small funeral insurance policy:

Keep in mind that final expense policies build cash value slowly. So in the first several years, the amount you can actually borrow may be small.

Interest Rates and Repayment: What to Know

A policy loan charges interest, just like other loans. The good news is the rate is often lower than a credit card or a personal loan. Rates on life insurance loans commonly fall between about 5% and 8% per year.

Repayment is flexible. There is no fixed monthly bill and no strict deadline. You can pay it back in one lump sum, in small amounts over time, or on your own schedule.

But there is one thing to watch closely. If you do not pay the interest, it gets added to your loan balance, and the balance keeps growing. If that balance ever grows larger than your cash value, the policy can lapse and end. A yearly check of your loan balance against your cash value helps you avoid that.

How an Unpaid Loan Affects Your Death Benefit

The death benefit is the money your family receives when you pass away. A policy loan you do not pay back will lower that amount.

Here is how it works. When you die, the insurance company looks at what you still owe on the loan. It subtracts that balance, plus any unpaid interest, from the death benefit. Whatever is left goes to your loved ones.

A simple example makes this clear. Say you have a $10,000 burial insurance policy and you borrowed $2,000 that you never paid back. Your family would receive about $8,000 instead of the full $10,000.

If you pay the loan back in full during your life, your family gets the whole death benefit. Repaying the loan restores the policy to what it was before.

There is one more thing to watch. If you never pay the interest, it keeps adding to your balance. If that balance ever grows larger than your cash value, the policy can lapse and end. A lapsed policy leaves your family with nothing, and it may also create a tax bill on part of the borrowed money.

Policy Loan vs. Surrender vs. Withdrawal

There is more than one way to get money out of a final expense insurance policy. Each one works differently, and each affects your coverage in its own way.

A policy loan lets you borrow against your cash value while keeping your coverage in place. You can repay it or not, and any unpaid balance is taken from the death benefit later.

Surrendering means canceling the policy for good. The company pays you the cash surrender value, which is your cash value minus any fees or unpaid loans. Once you surrender, the coverage is gone and your family will not receive a death benefit.

A withdrawal, sometimes called a partial surrender, takes out part of your cash value and keeps a smaller policy in force. It is worth knowing that many whole life final expense policies do not offer true partial withdrawals. On these plans, your two main choices are usually a loan or a full surrender, so it is best to ask your insurer what your policy allows.

Here is a side-by-side look:

For most people who still want to protect their loved ones, a loan keeps the coverage in place. Surrender is usually a last choice, because the whole reason for funeral insurance is to leave money behind for final costs.

When Borrowing Makes Sense (And When It Doesn’t)

Borrowing against your policy is a personal choice. It can help in the right moment, but it is not always the best move.

Borrowing may make sense when you face a true emergency, such as an urgent medical bill or a home repair you cannot cover another way. It can also work if you plan to pay the money back soon, since a quick repayment keeps your death benefit whole. And because the interest rate is often lower than a credit card, it can be a gentler option than high-cost debt.

Borrowing may not make sense in a few common cases:

• Your final expense policy is small, so there may not be enough cash value to help much, especially in the early years.
• You have no clear plan to repay, which means your family could receive less than you intended.
• You risk the policy lapsing if the loan and interest grow too large.
• You have other, better options, such as savings or a low-cost loan that does not touch your coverage.

It helps to remember why you bought the policy in the first place. Final expense insurance is meant to cover funeral costs, burial or cremation, and other final bills so your family does not have to. Borrowing from it works against that goal if the loan is left unpaid.

Before you decide, it is wise to talk with your agent or a trusted advisor. They can show you exactly how a loan would affect your policy and your family, so you can choose with confidence.