Yes, you can borrow against most permanent life insurance policies, but not term policies
If you own a permanent life insurance policy — whole life, universal life, or variable universal life — you can borrow against the cash value that has built up inside it. The insurance company lends you money using that cash value as collateral. You are not withdrawing your own money; you are borrowing against it, and you pay interest on the loan.
Term life insurance policies have no cash value, so there is nothing to borrow against. If you own term insurance, this option does not exist for you.
A policy loan is different from surrendering the policy or taking a withdrawal. When you borrow, the policy stays in force, death benefits remain in place (though reduced by the loan amount), and you keep building cash value. The loan sits between you and the insurance company — your beneficiaries will see the loan amount subtracted from what they receive when you die.
Key Takeaways
- Only permanent life insurance policies (whole life, universal life, variable universal life) have cash value you can borrow against; term policies cannot be borrowed against.
- A policy loan charges interest, and unpaid interest can compound and eventually reduce or eliminate your death benefit if the loan grows too large.
- You can borrow up to a percentage of your cash value — typically 75 to 90 percent — depending on your policy and the insurance company's rules.
- The loan process usually takes one to two weeks, and you can repay it on your own schedule or let it sit until you die or surrender the policy.
- Borrowing against your policy does not trigger a tax bill, but withdrawing more than you paid in premiums does, and a large unpaid loan can cause the policy to lapse and create unexpected taxes.
How much you can borrow and what it costs
The amount you can borrow depends on how much cash value has accumulated in your policy. Most insurance companies let you borrow between 75 and 90 percent of that cash value, though some policies allow up to 95 percent. A policy with $50,000 in cash value might let you borrow $37,500 to $47,500, depending on the company and policy type.
The interest rate on a policy loan varies. Some policies have a fixed rate written into the contract — often 5 to 8 percent, though this varies by when the policy was issued and the company's terms. Other policies use a variable rate that changes with market conditions, typically tied to a benchmark like the prime rate plus a margin. You should find the interest rate in your policy document or by calling your insurance company.
Interest accrues whether you pay it or not. If you do not make payments, the unpaid interest gets added to the loan balance, and you then owe interest on that interest. Over time, a large unpaid loan can grow to equal or exceed your cash value, which can cause the policy to lapse — meaning it stops being in force and you lose the death benefit. If the policy lapses and you have borrowed more than you paid in premiums over the years, the IRS treats the excess as taxable income.
The application process and how long it takes
To borrow against your policy, contact your insurance company directly — usually by phone, online portal, or mail. You will need your policy number and proof of identity. The company will verify your cash value, confirm how much you can borrow, and explain the interest rate that will apply.
Most policy loans are approved within one to two weeks. Some companies offer faster processing if you apply online or by phone. Once approved, the money is typically sent to you by check or direct deposit, depending on the company's options.
You do not need a credit check, and the company does not report the loan to credit bureaus. This is a transaction between you and your insurance company, not a consumer loan.
What happens to your death benefit and policy
When you take out a policy loan, your death benefit is reduced by the loan amount. If your policy has a $500,000 death benefit and you borrow $50,000, your beneficiaries will receive $450,000 when you die (minus any additional loans or unpaid interest that has accumulated).
The policy itself stays active as long as you pay the premiums. Borrowing does not change your premium payments or the terms of the policy. You can continue to add to the cash value by paying premiums, and that cash value can grow even while you have an outstanding loan.
If you repay the loan, the death benefit returns to its full amount. Repayment is flexible — you can pay it back on your own schedule, make partial payments, or let it sit unpaid. There is no deadline to repay, though unpaid interest will continue to accrue.
Tax consequences of borrowing against your policy
Borrowing against your policy does not create a tax bill. The loan itself is not taxable income because you are borrowing your own money, not receiving a gain.
However, taxes can arise if the policy lapses while you have an unpaid loan. If you stop paying premiums and the policy ends, the IRS treats any loan amount that exceeds what you paid in premiums as taxable income. For example, if you paid $100,000 in premiums over 20 years and borrowed $120,000 that remains unpaid when the policy lapses, you would owe income tax on the $20,000 difference.
Withdrawals are different from loans. If you withdraw cash value instead of borrowing, you owe taxes on any amount withdrawn above what you paid in premiums. Borrowing avoids this tax as long as the policy stays in force.
When borrowing against your policy makes sense
A policy loan can be useful when you need cash quickly and do not want to sell assets or take on a traditional loan. Because there is no credit check and no approval process beyond verifying your cash value, it is faster than a bank loan or home equity line of credit.
Policy loans also make sense if you want to keep your life insurance in place. Surrendering the policy or taking a withdrawal ends the coverage and removes the death benefit. Borrowing keeps the policy active and your beneficiaries protected.
A policy loan is less useful if you have little cash value built up yet — a policy issued recently may have only a few thousand dollars available to borrow. It is also not a good option if you cannot afford to repay the loan, because unpaid interest will compound and eventually erode the death benefit or cause the policy to lapse.
Alternatives to borrowing against your policy
If you need cash but are hesitant about borrowing against your policy, you have other options. You can withdraw cash value directly instead of borrowing, though this is taxable above what you paid in premiums and reduces the death benefit permanently. You can surrender the policy entirely and receive the full cash value, though this ends your coverage. You can also take out a traditional personal loan or home equity line of credit, which may have a lower interest rate depending on your credit and the lender.
Some people use a policy loan as a bridge while they explore other options. For example, you might borrow against the policy to cover an immediate expense, then repay the loan once you secure a lower-cost loan elsewhere.
Frequently Asked Questions
What happens 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 $50,000 and $5,000 in interest has accumulated, they receive $55,000 less than the stated death benefit. The loan does not prevent the death benefit from being paid — it simply reduces the amount.
Can I borrow against a policy I do not own?
No. You must be the policy owner to borrow against it. If someone else owns the policy on your life, they can borrow against it, but you cannot. If you are a beneficiary, you have no borrowing rights until the policy is transferred to you.
Will borrowing against my policy affect my credit score?
No. Policy loans are not reported to credit bureaus and do not appear on your credit report. They do not affect your credit score or your ability to borrow from banks or other lenders.
Can I borrow against a policy that is still being paid off?
Yes, as long as the policy has accumulated cash value. Some policies build cash value quickly; others take years. Check with your insurance company to find out how much cash value is currently available in your policy.
What if the interest rate on my policy loan is very high?
If your policy has a variable rate that has risen significantly, you can explore refinancing by taking out a new loan to pay off the old one, though this resets the clock on interest accrual. You can also contact your insurance company to discuss your options, though they cannot lower a rate that is written into your policy contract.