Yes, you can borrow from a permanent life insurance policy, but only certain types let you do 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 comes from your own policy's accumulated value, not from the insurance company lending you new funds — you are essentially borrowing against yourself, and the insurance company acts as the lender.
The loan does not require a credit check or approval process the way a bank loan does. The insurance company will lend you up to a percentage of your cash value (often 90 percent), and you can use the money for any reason. However, taking a loan reduces the death benefit your beneficiaries will receive, and unpaid interest can eventually consume your policy's value entirely.
Key Takeaways
- Only whole life and universal life policies have cash value you can borrow against; term life policies cannot be borrowed from.
- A policy loan does not require a credit check, and you can borrow up to roughly 90 percent of your cash value.
- Any unpaid loan balance and accrued interest reduce the death benefit your beneficiaries receive dollar-for-dollar.
- Interest rates on policy loans are set by your insurance company and typically range from 5 to 8 percent, though some policies have fixed rates locked in when you bought them.
- If the loan balance plus interest grows larger than your cash value, your policy can lapse and terminate, ending your coverage.
How a policy loan actually works
When you request a loan, the insurance company does not hand you a check from a separate lending division. Instead, they are allowing you to borrow against the cash value your premiums have built up. You sign a promissory note, and the funds are typically deposited into your bank account within one to two weeks.
You are responsible for paying back the loan with interest. The interest rate depends on your specific policy — some policies have a fixed rate set when you purchased them, while others have variable rates that change annually based on market conditions or the insurance company's cost of borrowing. Rates typically fall between 5 and 8 percent, though older policies sometimes have lower fixed rates.
Unlike a bank loan, there is no set repayment schedule. You can pay back the loan on your own timeline, or you can let it sit unpaid. However, any unpaid balance and accrued interest are subtracted from your death benefit when you die. If the loan balance grows larger than your remaining cash value, your policy can lapse entirely, leaving you with no coverage.
What happens to your death benefit when you borrow
The moment you take out a policy loan, your death benefit is reduced by the outstanding loan balance. If you borrowed $50,000 and your death benefit was $250,000, your beneficiaries would receive $200,000 (assuming you paid nothing back). If you then pay $20,000 back, the death benefit rises back to $220,000.
Interest that accrues on the unpaid loan also reduces the death benefit. If you borrowed $50,000 at 6 percent interest and made no payments for five years, you would owe roughly $67,000, and your beneficiaries would receive $67,000 less than the original death benefit. This is why a policy loan can become dangerous if left unpaid for many years — the interest compounds, and your coverage shrinks without you actively taking more money out.
The real cost of borrowing from your policy
A policy loan feels free because there is no application, no credit check, and no lender scrutinizing your finances. That convenience comes with a hidden cost: you are paying interest on money that was already yours. If you could borrow from a bank at 4 percent instead, you would save money by doing that rather than paying 6 or 7 percent to your insurance company.
Additionally, the cash value you borrow against is no longer earning the growth rate your policy would have credited to it. Some whole life policies credit a dividend or interest rate to unused cash value. When you borrow $50,000, that $50,000 stops earning that growth. Over time, this opportunity cost can be significant.
There is also a tax consideration: if your policy lapses while you have an outstanding loan, the IRS may treat the forgiven loan balance as taxable income. This is rare but possible if your policy terminates and you have not paid back what you borrowed.
When a policy loan makes sense
A policy loan is most useful when you need money quickly and have no other options, or when the interest rate on your policy is lower than what you would pay elsewhere. If your policy has a 4 percent fixed rate locked in from 20 years ago, and current bank loans cost 8 percent, borrowing from your policy is the cheaper choice.
Policy loans also make sense if you want to avoid disrupting your policy. Withdrawing cash value directly (rather than borrowing) is permanent — that money is gone, and your death benefit is reduced permanently. A loan keeps the policy intact and lets you restore the death benefit by repaying what you borrowed.
However, if you are considering a policy loan because you cannot afford your premiums, that is a sign your policy may not fit your budget long-term. Talk to your insurance agent about reducing your coverage or switching to a cheaper term policy instead of borrowing your way through a cash flow problem.
Alternatives to borrowing from your policy
Before taking a policy loan, explore whether you can borrow elsewhere at a lower rate. A personal loan from a bank, a line of credit, or even a credit card cash advance might cost less than your policy's interest rate. A home equity line of credit, if you own a home, often has rates lower than policy loans.
You can also withdraw cash value directly from your policy instead of borrowing it. Withdrawals are permanent and reduce your death benefit, but they do not accrue interest the way a loan does. If you only need the money once and do not plan to repay it, a withdrawal might be simpler than a loan you would carry for years.
If you are considering borrowing because you cannot afford premiums, contact your insurance company about a policy loan to pay premiums — some companies allow this. Alternatively, you can reduce your death benefit to lower your premium, or surrender the policy entirely if you no longer need the coverage.
What to do before you borrow
Call your insurance company and ask for a current policy statement showing your cash value, the interest rate on loans, and the current death benefit. This gives you the real numbers for your specific policy, not general estimates.
Ask whether your policy allows loans, what percentage of cash value you can borrow (usually 90 percent), and whether there are any fees beyond interest. Some policies charge a loan origination fee or annual loan maintenance fee.
Calculate whether you can afford to repay the loan on your timeline. If you borrow $30,000 at 6 percent and plan to repay it over five years, your annual interest cost will be roughly $900 in year one, declining as you pay down the balance. Make sure that fits your budget.
Finally, consider whether you actually need the coverage. If you are borrowing from a policy you bought 20 years ago and no longer need the death benefit, it might make more sense to surrender the policy and use the cash value directly, rather than borrowing and paying interest on money that is already yours.
Frequently Asked Questions
What happens if I don't pay back the loan?
The unpaid balance and accrued interest reduce your death benefit dollar-for-dollar. If the loan balance grows larger than your cash value, your policy will lapse and terminate, ending your coverage entirely. At that point, you lose the insurance protection and may owe taxes on the forgiven loan balance.
Can I borrow from a term life policy?
No. Term life policies have no cash value, so there is nothing to borrow against. Only whole life and universal life policies accumulate cash value over time. If you own a term policy, you cannot take out a loan against it.
Is the interest on a policy loan tax-deductible?
No. Unlike mortgage interest or student loan interest, interest paid on a life insurance policy loan is not tax-deductible. You pay the interest with after-tax dollars, which is another reason to compare the policy loan rate against other borrowing options.
How long does it take to get the money?
Most insurance companies process policy loans within one to two weeks. Some offer expedited processing if you need the money faster, though this may come with a fee. Call your insurance company to ask about their timeline and whether expedited options are available.
Can I borrow more than once from the same policy?
Yes. You can take multiple loans against your policy as long as the total outstanding balance does not exceed the amount you are allowed to borrow (usually 90 percent of cash value). Each loan accrues its own interest, and all unpaid balances reduce your death benefit.