1. “Borrow” money from a cash value life policy as an absolute last resort. If you own a home, consider an equity line before borrowing from your cash value. With an equity line, your interest is deductible and you will most often get a better rate than the insurance company is willing to offer. (See How to Obtain a Home Equity Loan.)
  2. Contact your insurance company if you have no other options and find out how large your cash value is and how much you can borrow. The amount available to you depends on how much cash has accumulated in the policy. That, in turn, depends on how long the policy’s been around, how much you’ve paid into it, and other factors. For example, if you have a $300,000 policy with a cash value of $50,000, your borrowing capability will be based on the $50,000 cash value.
  3. Understand that when you borrow against your cash value, you must pay interest on the amount you borrow. The interest you pay does not go into your cash value, as many people think. Instead it goes back into the pockets of the insurance company.
  4. Carefully check the terms and conditions of the loan. Some insurance companies restrict how much of your cash value you can borrow, and some have special payback terms. Make certain that the interest rates are lower than what other loan sources, such as home equity loans, are offering.
  5. Withdraw the money. There is no restriction on how you can use the money, as there is with a 401(k) withdrawal, for example. You don’t ever have to pay it back, as long as you’re willing to have a reduced death benefit for your beneficiaries when you do pass away. But, you’ll also pay interest on it for the rest of your life. On top of that, any interest you owe on that loan will also be deducted from the payout.

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