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 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 money you borrow comes from your own accumulated cash value — the insurance company is lending you access to your own funds, not giving you new money.
A policy loan is different from a withdrawal. When you borrow, the loan accrues interest and you repay it. The unpaid balance reduces what your beneficiary receives when you die. When you withdraw cash value instead, you permanently reduce the policy's death benefit and may trigger a tax bill.
The main reason people borrow from life insurance is speed and simplicity. You do not need to may have access to based on credit or income. The lender already knows everything about you — they issued the policy. Approval typically takes days, not weeks.
Key Takeaways
- Only whole life and universal life policies have cash value you can borrow against; term life policies do not.
- A policy loan charges interest and reduces your death benefit by the unpaid balance, so the full benefit goes to your beneficiary only if you repay the loan before you die.
- Interest rates on policy loans are set in your policy contract and do not change based on credit scores or market conditions.
- Borrowing from your policy does not require a credit check or income verification, making it faster than a bank loan or line of credit.
- If you do not repay the loan and die, the unpaid balance plus accrued interest is subtracted from what your beneficiary receives.
How much you can borrow and what it costs
The amount you can borrow is limited to the cash value in your policy, minus any existing loans against it. A 10-year-old whole life policy might have $5,000 in cash value; you could borrow up to that amount. A newer policy or one with small premiums might have little or no cash value yet, so borrowing would not be possible.
Interest rates are locked into your policy contract when you buy it. Whole life policies typically charge 5 to 8 percent annually, though some older policies have lower rates. Universal life policies vary more widely depending on the product and when it was issued. Unlike a credit card or home equity line, your rate will not change if market conditions shift or your credit score drops.
Interest accrues annually and is added to the loan balance. If you borrow $10,000 at 6 percent and make no payments, you owe $10,600 after one year, $11,236 after two years, and so on. You can repay the loan on your own schedule — there is no fixed payment amount or deadline — but unpaid interest keeps growing.
What happens to your death benefit when you have an outstanding loan
Your death benefit is reduced by whatever you still owe on the loan, including accrued interest. If your policy has a $250,000 death benefit and you borrowed $30,000 that has grown to $35,000 with interest, your beneficiary receives $215,000, not $250,000.
This matters most if you borrow late in life or if you become ill and do not expect to repay the loan before you die. A younger person who borrows $20,000 and repays it over five years faces no permanent reduction. Someone who borrows at 70 and never repays it is essentially converting part of their death benefit into a loan.
If the loan balance plus accrued interest ever exceeds the cash value of your policy, the policy can lapse — meaning it terminates and your coverage ends. This is rare but possible if you borrow heavily, do not make payments, and the policy's cash value does not grow as projected. Your insurance company will typically send warnings before this happens, giving you time to repay or add money to the policy.
The difference between borrowing and withdrawing cash value
A withdrawal takes money out permanently and reduces your death benefit dollar-for-dollar. If you withdraw $10,000, your death benefit drops by $10,000 and stays dropped. You do not repay it. However, withdrawals can trigger income tax if you withdraw more than the total premiums you have paid into the policy.
A loan lets you access the cash value without permanently shrinking the death benefit, as long as you repay it. The trade-off is that you pay interest and the loan balance reduces your benefit until repaid. For most people, borrowing is the better choice if they plan to repay within a few years, and withdrawal makes sense only if they need the money permanently and do not mind a smaller death benefit.
Some policies allow you to do both — borrow against part of the cash value and withdraw the rest. Your insurance company can tell you what your specific policy permits.
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. Most companies let you request a loan online, by phone, or by mail.
The company will verify your cash value, confirm you are not already at the borrowing limit, and explain the interest rate and terms. They will ask how much you want to borrow and where to send the money. Most companies deposit the funds into your bank account within 3 to 7 business days.
You do not need to explain why you want the money or provide financial documents. The company already has your policy file and knows the cash value available. There is no underwriting process or credit check.
Tax consequences of borrowing from your policy
A policy loan itself is not taxable income. You are borrowing your own money, so the IRS does not treat it as income in the year you borrow. However, if the policy lapses or you surrender it while a loan is outstanding, the forgiven loan balance may become taxable.
For example, if you borrow $20,000, never repay it, and then cancel the policy, the $20,000 (plus any accrued interest) could be treated as taxable income. This is complex and depends on whether your total premiums paid exceed the cash value. A tax professional can advise you on your specific situation before you borrow.
Interest you pay on the loan is also not tax-deductible. Unlike mortgage interest or student loan interest, life insurance policy loan interest does not reduce your taxable income.
When borrowing from your policy makes sense
A policy loan is most useful for short-term needs where you expect to repay within a few years. Examples include covering a medical bill, making a down payment on a car, or bridging a gap during a job transition. The speed and simplicity beat a bank loan, and the interest rate is usually competitive with unsecured personal loans.
Borrowing is less attractive if you need the money long-term or do not plan to repay. In that case, a withdrawal might be clearer — you get the money, your death benefit shrinks, and you move on. Borrowing and never repaying is essentially the same outcome, but with added interest cost and complexity.
If you are considering a large loan that would significantly reduce your death benefit, talk to your insurance agent first. They can model what happens to your coverage and help you decide whether borrowing, withdrawing, or finding another funding source makes the most sense for your situation.
Frequently Asked Questions
Can I borrow from my life insurance if I have missed premium payments?
It depends on your policy's terms. Some policies allow loans even if premiums are behind, as long as the policy has not lapsed. Others require premiums to be current. Contact your insurance company to find out. If your policy has lapsed, you cannot borrow from it.
What happens if I die with an unpaid policy loan?
Your beneficiary receives the death benefit minus the unpaid loan balance and any accrued interest. If you borrowed $25,000 and it grew to $30,000 with interest, and your death benefit is $200,000, your beneficiary gets $170,000. The loan is settled from the death benefit before payment.
Can I borrow from a policy I own on someone else's life?
Yes, if you own the policy and it has cash value, you can borrow against it. The person whose life is insured does not need to approve the loan. However, if that person dies while you have an outstanding loan, the loan balance reduces the death benefit you receive.
Is a policy loan better than a credit card or personal loan?
For most people, yes — if you have the cash value available. Policy loans typically charge 5 to 8 percent interest, which is lower than most credit cards and competitive with personal loans. You do not need a credit check or income verification. The main drawback is that you can only borrow what you have already saved in the policy.
Can I borrow from my policy if it is in a trust?
Usually yes, but it depends on how the trust is written. Some trusts restrict borrowing or require trustee approval. Check your trust document or ask your insurance company and your attorney. If you are the trustee, you may have the authority to request the loan on the trust's behalf.