Yes, you can borrow against a permanent life insurance policy, but only certain types allow it

If you own a whole life or universal life insurance policy, you can borrow money against the cash value that has built up inside it. Term life insurance does not have this option because it has no cash value — it is pure death benefit with no savings component. The loan comes from the insurance company, and you repay it with interest. If you die before repaying, the outstanding loan balance is subtracted from what your beneficiaries receive.

This is different from surrendering the policy, which means cancelling it entirely and taking out whatever cash value exists. A loan lets you keep your coverage in place while accessing money. The trade-off is that you pay interest and reduce the death benefit your family will eventually receive.

Key Takeaways

  • Only whole life and universal life policies have cash value you can borrow against; term life policies do not.
  • The loan amount is limited to a percentage of your cash value, typically 75 to 90 percent, depending on your policy and insurer.
  • Interest rates on policy loans vary by insurer and policy type, and unpaid interest compounds over time and reduces your death benefit.
  • If you die with an outstanding loan, your beneficiaries receive the death benefit minus whatever you still owe.
  • You do not have to repay a policy loan on a set schedule, but unpaid balances grow and can eventually consume your entire cash value.

How much you can borrow depends on your cash value

The amount available to borrow is not the full cash value of your policy. Insurance companies typically allow you to borrow between 75 and 90 percent of the cash value, though the exact percentage varies by insurer and policy type. Some policies are more restrictive. You will need to contact your insurance company or check your policy documents to find out the specific borrowing limit.

Cash value grows slowly in the early years of a policy. If you have owned your whole life policy for only two or three years, the cash value may be small, and the borrowing limit even smaller. Policies that have been in force for ten years or more typically have enough cash value to make a meaningful loan possible. Universal life policies can accumulate cash value faster or slower depending on how the policy was structured and how interest rates have moved.

Interest rates and repayment terms

Policy loans are not interest-free. The interest rate is set by your insurance company and is stated in your policy documents. Rates typically range from 5 to 8 percent, though this varies. Some older policies have fixed rates locked in when the policy was issued; newer policies may have variable rates that change with market conditions. You should ask your insurer what rate applies to your specific policy before you borrow.

Unlike a traditional bank loan, you are not required to make monthly payments on a policy loan. You can repay it whenever you want, or not at all during your lifetime. However, any interest you do not pay gets added to the loan balance, and that unpaid interest earns interest itself. Over time, a small loan can grow substantially if left unpaid. If the loan balance plus accumulated interest eventually exceeds your cash value, the policy can lapse and your coverage ends.

What happens to your death benefit

When you take out a policy loan, your death benefit does not disappear, but it is reduced by the amount you still owe. If you borrowed $50,000 and die with $40,000 still unpaid, your beneficiaries receive the full death benefit minus that $40,000. This is an important consideration if you are relying on the policy to provide a specific amount of money to your family.

The reduction applies only to what you owe at the time of death. If you repay part or all of the loan before you die, the death benefit is restored to its full amount. Some people use policy loans as a temporary measure and plan to repay them within a few years for this reason.

Alternatives to borrowing against your policy

Before you take out a policy loan, consider whether other options might work better for your situation. A personal loan from a bank or credit union may have a lower interest rate, especially if you have good credit. A home equity line of credit, if you own a home with equity, often has lower rates than a policy loan. A credit card cash advance is usually more expensive but faster to access.

If you are considering the loan because you cannot afford your premiums, talk to your insurance company about other options. Some policies allow you to reduce the death benefit temporarily, lower your premiums, or use the cash value to pay premiums for a period of time. Surrendering the policy and taking the cash value is also an option if you no longer need the coverage, though you may owe income tax on gains above what you paid in premiums.

How to request a policy loan

Contact your insurance company directly — either by phone, through their website, or by mail. You will need your policy number. The company will tell you how much you can borrow, what the current interest rate is, and what documents you need to sign. Most insurers can process a loan request within one to two weeks. Some offer faster processing if you apply online.

The money is typically sent to you by check or direct deposit. Some insurers allow you to borrow multiple times against the same policy, though each new loan is a separate transaction with its own interest rate and terms. Keep records of all loans and repayments for your own tracking and for tax purposes if needed.

Tax implications of policy loans

A policy loan itself is not taxable income — you are borrowing your own money, not receiving income. However, if you borrow more than the total premiums you have paid into the policy, the amount over your basis may be taxable. This is rare with whole life policies but more common with universal life policies that have been in force for many years and have accumulated significant cash value.

If your policy lapses or you surrender it while you have an outstanding loan, the situation becomes more complex. You should discuss the tax consequences with a tax professional before taking out a large loan or surrendering a policy with a loan balance. The insurance company will issue tax forms if you owe tax on any part of the transaction.

Frequently Asked Questions

Can I borrow against a term life insurance policy?

No. Term life policies have no cash value, so there is nothing to borrow against. Only whole life and universal life policies build cash value over time. If you need to borrow money and own only a term policy, you will need to explore other lending options.

What happens if I don't repay the loan before I die?

Your beneficiaries will receive the death benefit with the unpaid loan balance subtracted. If you borrowed $30,000 and still owe $28,000 when you die, your beneficiaries get the full death benefit minus $28,000. This is why it matters to consider how a loan affects the money your family will receive.

Can I borrow against my policy if I have missed premium payments?

It depends on your policy and insurer. Some policies allow loans even if premiums are behind, while others do not. Contact your insurance company to ask. If your policy has lapsed due to missed payments, you cannot borrow against it unless you reinstate it first.

Is the interest on a policy loan tax-deductible?

No. Unlike interest on mortgages or student loans, interest paid on policy loans is not deductible for tax purposes. This is one reason to compare the cost of a policy loan to other borrowing options before you decide.

What if the loan balance grows larger than my cash value?

If unpaid interest causes the loan to exceed your cash value, your policy will lapse and your coverage ends. You will no longer have life insurance protection. To prevent this, either repay the loan or contact your insurer about options to keep the policy in force.