Yes, you can borrow from 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 against the cash value that has built up inside it. Term life insurance has no cash value, so borrowing is not an option. The loan comes from the insurance company, and you repay it with interest — the money does not come from your death benefit unless you fail to repay and the loan balance grows large enough to consume it.
The mechanics are straightforward: the insurance company lends you money using your policy's cash value as collateral. You keep paying your regular premiums, and you make separate loan payments on whatever you borrow. If you die before repaying the loan, the insurance company subtracts what you owe from the death benefit your beneficiaries receive.
Key Takeaways
- Only whole life and universal life policies have cash value you can borrow against; term life policies cannot be borrowed from.
- The loan amount is limited to a percentage of your cash value, typically 75 to 90 percent, depending on your policy and the insurance company.
- You pay interest on the loan, and the rate varies by insurer and policy type — some charge a fixed rate, others charge a variable rate tied to market conditions.
- If you do not repay the loan, the unpaid balance and interest reduce your death benefit dollar-for-dollar.
- Borrowing does not require a credit check or approval process the way a bank loan does; the insurance company simply deducts the loan from your cash value.
How much you can borrow and what it costs
The amount you can borrow is capped at a percentage of your policy's cash value — usually between 75 and 90 percent. If your policy has $10,000 in cash value and your insurer allows 80 percent loans, you can borrow up to $8,000. The exact limit depends on your specific policy and the insurance company's rules.
Interest rates on policy loans vary. Some insurers charge a fixed rate set when you took out the policy — this might be 5, 6, or 8 percent depending on when the policy was issued. Others charge a variable rate that changes annually, often tied to a published index like the prime rate. A few insurers use a spread method, charging the index rate plus a set percentage. You will find the loan interest rate in your policy document or by calling your insurance company.
The loan does not require a credit check, employment verification, or the approval delays you would face with a bank. You request it, the insurance company processes it, and the money typically arrives within days. There are no prepayment penalties — you can repay the full amount whenever you want without extra fees.
What happens if you do not repay the loan
If you borrow $5,000 and never repay it, that $5,000 plus accumulated interest stays owed to the insurance company. When you die, your beneficiaries receive the death benefit minus whatever you still owe. If your death benefit is $100,000 and you owe $8,000 in loan principal and interest, your beneficiaries get $92,000.
If the loan balance grows large enough to equal or exceed your cash value, the policy can lapse — meaning it terminates and you lose the coverage entirely. The insurance company will typically send you notices warning that this is about to happen, giving you time to repay part of the loan or add money to the policy. But if you ignore those notices, the policy ends and you are no longer insured.
Interest accrues whether you make payments or not. If you borrow $5,000 at 6 percent and make no payments, after five years you owe roughly $6,700. The longer the loan sits unpaid, the faster it grows.
Tax consequences of borrowing from your policy
A policy loan itself is not taxable income — the IRS does not treat it as money you earned. You borrowed against your own cash value, so there is no tax event when you receive the loan.
However, if you borrow more than the total premiums you have paid into the policy, the amount over your basis becomes taxable. This is rare for most people, but it can happen if your policy has grown significantly and you borrow a large sum. Your insurance company can tell you your cost basis (total premiums paid) and will report any taxable loan amount on a Form 1099-R if it applies.
If your policy lapses or you surrender it while a loan is outstanding, the unpaid loan balance may also trigger a tax bill. Consult a tax professional if you are considering a large loan or if your policy has substantial cash value.
Alternatives to borrowing from your policy
If you need cash but want to keep your insurance in force, you have other options. A policy surrender means you give up the policy entirely and receive its cash value in a lump sum — but you lose all death benefit coverage. This makes sense only if you no longer need the insurance.
A partial surrender or withdrawal lets you take out part of the cash value without borrowing. You keep the policy active, but the death benefit is reduced by whatever you withdraw. Unlike a loan, you do not repay withdrawals, but you also do not owe interest. Some policies allow withdrawals; others do not.
You can also simply stop paying premiums and let the policy use its cash value to pay them automatically — this is called automatic premium loan or APL. The policy borrows from itself to cover premiums you miss, keeping you insured without you having to request a loan or make separate loan payments. The borrowed amount still accrues interest and reduces your death benefit, but it happens silently in the background.
When borrowing from your policy makes sense
A policy loan is most useful when you need cash quickly and do not have other options, or when you want to avoid the credit check and approval process of a traditional loan. The interest rate is often lower than a credit card or personal loan, especially if your policy has a fixed rate locked in years ago.
It also makes sense if you are temporarily short on cash but expect to repay within a few years. The longer the loan sits unpaid, the more interest accumulates and the more it erodes your death benefit.
A policy loan is usually not the right choice if you are borrowing to cover ongoing expenses you cannot afford — that signals a deeper cash flow problem that a loan will not solve. It is also not ideal if you are elderly or in poor health, because an unpaid loan could consume your death benefit before your beneficiaries receive anything.
How to request a policy loan
Contact your insurance company directly — call the number on your policy statement or visit their website. You will need your policy number and will have to specify how much you want to borrow. Some insurers let you request a loan online; others require a phone call or written request.
The insurance company will confirm your cash value, calculate how much you are allowed to borrow, and explain the interest rate that applies to your policy. They will send you loan documents to sign and will deposit the money into your bank account or send a check.
The entire process usually takes one to two weeks. Once the loan is funded, you will receive a statement showing the loan balance and the monthly or annual payment amount. You can set up automatic payments or pay manually.
Frequently Asked Questions
Does borrowing from my policy affect my credit score?
No. A policy loan does not appear on your credit report because it is not a credit transaction — you are borrowing against your own cash value, not borrowing from a lender. Your credit score is unaffected.
Can I borrow from a policy I just bought?
Not immediately. Whole life and universal life policies take time to build cash value. Most policies do not allow loans until at least one to three years of premiums have been paid. Check your policy document or call your insurance company to find out when you become may be able to access.
What if I die with an unpaid policy loan?
Your beneficiaries receive the death benefit minus the unpaid loan balance and any accrued interest. If you borrowed $10,000 and still owe $12,000 when you die, the death benefit is reduced by $12,000. The loan does not prevent the death benefit from being paid — it just reduces it.
Can I borrow from a policy owned by someone else?
Generally no. You can only borrow from a policy you own. If someone else owns the policy, they must request the loan. The exception is if you are the designated beneficiary and the policy owner has given you power of attorney, but this is uncommon and requires explicit legal authority.
Is there a limit to how many times I can borrow?
No. You can request multiple loans as long as your total borrowing does not exceed the allowed percentage of your cash value. If you can borrow 80 percent of $10,000 and you already have a $5,000 loan outstanding, you can borrow up to $3,000 more (80 percent of $10,000 minus the $5,000 already borrowed).