Borrowing From Your Whole Life Policy in Florida

Quick answer: can you borrow from a whole life policy?

Often, yes. Many whole life policies let the owner borrow from the insurance company, using the policy’s cash value as security. Whether your policy allows a loan, and how much, depends on its terms, its cash value, and any loan already owed.

Cash value is the part of a whole life policy that builds over time. Loan value is the amount the insurer will lend against that cash value under the policy’s terms.

Florida law sets some rules for these loans. Under Fla. Stat. § 627.458, a loan is available only after the policy has a cash surrender value and no premium is in default. Fla. Stat. § 627.458 reads: “The loan value of the policy shall be at least equal to the cash surrender value at the end of the then-current policy year, except that the insurer may deduct, either from such loan value or from the proceeds of the loan, any existing indebtedness not already deducted in determining such cash surrender value, including any interest then accrued but not due, any unpaid balance of the premium for the current policy year, and interest on the loan to the end of the current policy year.” A new policy may not allow a loan right away. The insurer may defer granting a policy loan for 6 months after the loan application, except for a loan used to pay the insurer a premium. Term policies are outside this loan rule.

How a whole life policy loan works

The insurer is the lender, and the policy itself is the collateral. The policy is the sole security for the loan, so you don’t pledge other property under this rule. Fla. Stat. § 627.458 reads: “The loan value of the policy shall be at least equal to the cash surrender value at the end of the then-current policy year, except that the insurer may deduct, either from such loan value or from the proceeds of the loan, any existing indebtedness not already deducted in determining such cash surrender value, including any interest then accrued but not due, any unpaid balance of the premium for the current policy year, and interest on the loan to the end of the current policy year.”

The loan value must be at least equal to the cash surrender value at the end of the current policy year. Fla. Stat. § 627.458 reads: “The loan value of the policy shall be at least equal to the cash surrender value at the end of the then-current policy year, except that the insurer may deduct, either from such loan value or from the proceeds of the loan, any existing indebtedness not already deducted in determining such cash surrender value, including any interest then accrued but not due, any unpaid balance of the premium for the current policy year, and interest on the loan to the end of the current policy year.” The insurer can subtract existing debt, unpaid premium for the current year, and loan interest through the end of that year. Fla. Stat. § 627.458 reads: “The loan value of the policy shall be at least equal to the cash surrender value at the end of the then-current policy year, except that the insurer may deduct, either from such loan value or from the proceeds of the loan, any existing indebtedness not already deducted in determining such cash surrender value, including any interest then accrued but not due, any unpaid balance of the premium for the current policy year, and interest on the loan to the end of the current policy year.” In plain words, the amount you can actually receive may be lower than the cash value you see on a statement.

A policy loan is not a premium payment. Under Fla. Stat. § 627.453, every insurance contract must give the insured a grace period of at least 30 days to pay any premium after the first. (Under Fla. Stat. § 627.458, loans are available only after the policy has a cash surrender value and no premium is in default.) During that grace period, the policy stays in force. You can read the rule in Fla. Stat. § 627.453. Keep the two ideas apart.

Florida’s surrender rules also treat a policy loan differently from a surrender. The definition in Fla. Stat. § 627.4553 excludes a policy loan, so a loan has its own terms to read.

Interest, repayment, and what happens if the loan is not repaid

Loan interest comes from the policy’s terms, so read the rate in your own contract. Rates and terms are not the same in every policy.

Florida law allows a policy to say that unpaid loan interest is added to the loan balance. That added balance then bears interest at the same rate. So the amount owed can grow if interest goes unpaid. See Fla. Stat. § 627.458.

Many policies let you repay on your own schedule. Still, the balance does not disappear. Any unpaid loan and interest reduce what your family receives when the insured dies.

One way a whole life policy can lapse is through its loan: if the policy so provides, it can terminate when total indebtedness, including interest due or accrued, equals or exceeds the loan value, and then not until at least 30 days after the insurer mails notice to the last known address of the insured or policyowner and of any assignee of record at the insurer’s home office. Lapse means the coverage your family counts on can stop. It can also bring tax consequences.

Effect on the death benefit, cash value, and illustrations

A loan usually does not stop the policy on its own. It does lower the payout. The death benefit is reduced by the loan balance and any unpaid interest, under the policy’s terms.

Cash value can also drop after a loan, because the loan is secured by that cash value. Less cash value can mean less room for a future loan.

Life insurance proceeds paid because of death are generally excluded from gross income under 26 U.S.C. § 101. A loan balance still reduces the amount your beneficiaries receive.

If an illustration shows growing values, look for guaranteed values and non-guaranteed values shown separately. Non-guaranteed values depend on the insurer’s future decisions. Read every limit on an illustration with the same weight as the projected numbers.

Dividends, paid-up additions, and how a loan can affect them

Some whole life policies pay dividends. Dividends are not guaranteed. The insurer decides them each year, and they can change.

Some owners use dividends to buy paid-up additions. Under the policy’s terms, paid-up additions add to cash value and death benefit.

A loan can change how much cash value earns dividends or interest under some policy designs. The effect depends on the policy. Check your own contract’s terms before you borrow.

Treat dividends as a possible policy feature, not a sure payment or a profit. Use the generic name, whole life insurance policy, when you describe the coverage.

Tax questions a CPA would check before borrowing

Before you borrow, check the tax position of the specific policy. These are points to verify against the policy’s details. No tax result is assured.

First, check whether the policy is a modified endowment contract. A policy funded faster than the 7-pay test allows can become one under 26 U.S.C. § 7702A. That status can change how loans and withdrawals are taxed.

Second, check what happens if the policy ends. For purposes of section 72, IRC § 7702A states that a “modified endowment contract” is a contract that meets the requirements of section 7702 and also meets further conditions in that section, which include failing the 7-pay test: a contract fails that test if the total amount paid at any time during the first 7 contract years is more than the sum of the net level premiums that would have been paid by then if the contract provided paid-up future benefits after 7 level annual premiums.

Third, review the policy’s cash surrender value.

Pros and cons of borrowing against a whole life policy

Pros: You can access cash tied to the policy. Many policies let you repay on your own schedule. The policy can stay in force while a loan is outstanding, as long as premiums are paid and the loan stays within the policy’s terms.

Cons: The death benefit can shrink. Interest can add up. The policy can lapse if the balance grows too large. Tax consequences are possible. Some policy designs can slow cash value growth.

Using loan or cash values to buy another policy from the same insurer can be churning under Florida law. That happens when policy values are used to buy another policy from the same insurer for the purpose of earning additional premiums, fees, commissions, or other compensation, and there is no objectively reasonable basis to expect an actual and demonstrable benefit to you. See Fla. Stat. § 626.9541.

If the owner lives outside the United States, or a beneficiary does, confirm how loans and payments work under the policy. Also check the rules where the family lives.

Whether a loan fits depends on the facts of the policy and your situation.

Key takeaways and your next step

• Policy loans come from the insurer and use cash value as security.
• Unpaid interest adds to the balance and reduces the death benefit.
• A balance that grows too large can end the policy after notice.
• Check the policy’s tax status before you borrow.

NR CPAs & Business Advisors is a Miami CPA firm. It helps families, professionals, and business owners across the United States choose and buy life insurance, including NRI life insurance.

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