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November 5, 2025
Introduction
While life insurance serves as a safety net for your loved ones, it also offers policyholders unexpected flexibility when cash needs arise. Whether facing a medical emergency, investing in a business, or simply needing breathing room during tough times, your life insurance policy can be used for quick, tax-advantaged funding.
How Life Insurance Loans Work
When you borrow against a life insurance policy, you’re using its cash value as collateral. The insurer lends you money secured by that value, not from your death benefit directly, but against it.
You can typically borrow up to 90% of your policy’s cash value. Interest rates range from about 5-10%, and funds usually arrive within a few business days. There are no credit checks or income requirements, and repayment is entirely up to you. Unpaid balances (plus interest) simply reduce your death benefit.
Eligible Policy Types
Only permanent life insurance policies build cash value you can borrow from:
Whole Life: Predictable premiums and steady, guaranteed cash value growth.
Universal Life: Flexible premiums and interest rates tied to the market.
Indexed Universal Life (IUL): Growth tied to indexes like the S&P 500, with downside protection.
Variable Life: Investment-based growth with higher potential returns and higher risk.
Term life has no cash value and can’t be borrowed against.
Benefits
Quick and simple access: No underwriting, credit checks, or approvals.
Tax-free proceeds: Loans aren’t treated as income.
Flexible repayment: Pay on your schedule, or not at all.
Credit-neutral: Loans don’t affect your credit report.
Ongoing growth: Your policy’s cash value continues earning even with an outstanding loan.
Risks
Reduced death benefit: Any unpaid loan lowers the payout your beneficiaries receive.
Interest accumulation: Compounded interest can grow quickly if ignored.
Lapse risk: If the loan plus interest exceeds the cash value, your policy can lapse and trigger a taxable event.
Lost compounding: Borrowed funds no longer benefit from long-term policy growth.
When It Makes Sense
A life insurance loan can make sense when you need short-term liquidity and have a clear repayment plan. For example:
Covering medical expenses
Funding a business opportunity
Bridging cash flow gaps
Paying off high-interest debt
It’s less ideal for long-term borrowing or discretionary spending.
New Alternatives: Bitcoin-Backed Loans
For crypto holders, platforms like Arch Lending offer a modern version of the same idea. Instead of tapping into your life insurance, you can borrow against your Bitcoin without selling it.
Funds typically arrive same day or next business day, rates are very competitive, and your insurance coverage stays intact. Collateral is held securely with institutional-grade custody, and you retain upside if Bitcoin appreciates.
Conclusion
Borrowing against life insurance can be a smart way to access cash without selling assets or disrupting your financial plan. But it’s not your only option. For investors holding Bitcoin or other digital assets, platforms like Arch Lending offer faster funding and similar tax advantages, all while keeping your life insurance policy untouched. Evaluate all options carefully and choose the one that best fits your financial goals and liquidity needs.
Frequently Asked Questions
Can I borrow against term life insurance? No. Term life insurance provides pure death benefit protection without building cash value. Only permanent policies like whole life, universal life, and variable life accumulate borrowable value.
What happens if I don't repay the loan? The outstanding balance plus accumulated interest reduces your death benefit. If the total exceeds your cash value, the policy could lapse, potentially triggering taxable income on the forgiven amount.
How quickly can I get funds? Life insurance loans typically fund within 3-10 business days after approval.
Will this affect my credit score? Life insurance loans don't require credit checks and don't appear on credit reports. Your credit score remains unaffected. Bitcoin-backed loans may involve soft credit inquiries but typically don't impact scores significantly.
How does this compare to bitcoin-backed loans? Both use assets as collateral without selling. Bitcoin loans often feature faster processing, competitive rates, and don't impact insurance coverage. However, cryptocurrency volatility adds risk not present with insurance loans.
What are the tax implications? Life insurance loans aren't taxable income when received. However, if your policy lapses with outstanding loans, forgiven amounts become taxable.
About Arch
Arch is building a next-gen wealth management platform for individuals holding alternative assets. Our flagship product is the crypto-backed loan, which allows you to securely and affordably borrow against your crypto. We also offer access to bank-grade custody, trading and staking services.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Cryptocurrency investments are volatile and risky. Always conduct your own research before making investment decisions.