Yes, you can borrow against a life insurance policy, but only certain types allow it
You can borrow money against a permanent life insurance policy — meaning whole life, universal life, or variable universal life — but not against term life insurance. The reason is simple: permanent policies build cash value over time, and that cash value is what you borrow against. Term policies have no cash value, so there is nothing to borrow.
The loan comes from your insurance company, and you are borrowing against your own money that sits in the policy. The company does not check your credit or employment. You do not have to repay the loan on a set schedule, though unpaid loans accrue interest and reduce the death benefit your beneficiaries receive.
This is different from a loan against your home or car. You are not pledging the policy as collateral — you are borrowing the cash value that already belongs to you.
Key Takeaways
- Only permanent life insurance policies (whole life, universal life, variable universal life) have cash value you can borrow against; term life policies do not.
- A policy loan does not require a credit check or employment verification because you are borrowing your own money.
- Any unpaid loan balance accrues interest and reduces the death benefit paid to your beneficiaries when you die.
- You can borrow up to the full cash value of your policy, though most people borrow less to keep some death benefit intact.
- The interest rate on a policy loan is set by your insurance contract and is usually lower than a personal loan or credit card.
How much cash value you can actually borrow
The amount you can borrow depends on how long you have owned the policy and how much cash value has accumulated. In the early years of a permanent policy, cash value builds slowly because the insurance company deducts commissions and administrative costs. After five to ten years, the cash value grows more predictably.
Most insurance companies let you borrow up to 90 percent of the cash value, though some allow 100 percent. If your policy has a cash value of $10,000, you might borrow $9,000. The remaining $1,000 stays in the policy to keep it active and to preserve some death benefit for your beneficiaries.
You can find your current cash value on your policy statement or by calling your insurance company. The statement will also show the maximum loan amount available to you right now.
What happens to your death benefit when you borrow
When you take out a policy loan, the death benefit does not disappear — it shrinks by the amount you borrowed plus any unpaid interest. If your policy has a $100,000 death benefit and you borrow $20,000, your beneficiaries will receive $80,000 when you die (assuming you do not repay the loan).
If you repay the loan before you die, the full death benefit is restored. This is why many people who take policy loans try to repay them: they want their beneficiaries to receive the full amount they paid premiums for.
If the loan balance grows larger than the cash value — which can happen if interest accrues for many years — the policy can lapse and terminate. When that happens, you lose the death benefit entirely and may owe taxes on the difference between what you borrowed and what you paid into the policy. This is rare but possible if you borrow a large amount and never repay it.
The interest rate and repayment terms
The interest rate on a policy loan is written into your insurance contract when you buy the policy. It is usually between 5 and 8 percent, though it varies by company and policy type. This rate is typically lower than a personal loan or credit card, which is one reason people use policy loans.
Unlike a bank loan, you do not have a required repayment schedule. You can repay the loan whenever you want — in a lump sum or in installments — or you can let it sit unpaid for years. The interest simply accrues and is deducted from your death benefit.
Some policies have a variable interest rate that changes each year based on market conditions. Your policy statement will tell you whether your rate is fixed or variable and what the current rate is.
When a policy loan makes sense
A policy loan can be useful if you need cash and do not want to sell the policy or surrender it. Because there is no credit check and no required repayment schedule, it is faster and simpler than a bank loan. The interest rate is usually lower than other borrowing options.
People often use policy loans for emergencies — a medical bill, a car repair, or a short-term cash shortage. Others use them to bridge a gap between jobs or to cover a business expense when cash flow is tight.
A policy loan is less useful if you plan to never repay it. The interest will compound, the death benefit will shrink, and eventually the policy can lapse. If your goal is to access the cash permanently, surrendering the policy or taking a withdrawal might be better options, though both have tax consequences.
Policy loans versus withdrawals and surrenders
You have three ways to access the cash value in a permanent policy: borrow against it, withdraw from it, or surrender the entire policy. Each has different tax and insurance consequences.
A policy loan is not taxable as long as the loan balance does not exceed what you paid into the policy (your cost basis). You keep the policy and the death benefit intact (reduced by the loan amount). Interest accrues and must eventually be repaid or deducted from the death benefit.
A withdrawal lets you take cash out without borrowing. Withdrawals are tax-free up to your cost basis, but anything above that is taxable as income. Once you withdraw cash, that amount is gone from the policy and the death benefit is permanently reduced.
A surrender means you cancel the policy and take all remaining cash value. You lose the death benefit entirely. Any gain above your cost basis is taxable income. Surrendering makes sense only if you no longer need the death benefit.
Tax consequences of policy loans
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 you die with an unpaid loan balance, the loan amount is deducted from the death benefit before it is paid to your beneficiaries. Your beneficiaries receive less money, but they do not owe taxes on the loan itself.
If the policy lapses because the loan balance grows too large, you may owe taxes on the difference between the total amount you borrowed and what you paid into the policy. This is called a taxable gain. A tax professional can help you understand the specific tax impact of your situation.
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 permanent policies (whole life, universal life, variable universal life) build cash value and allow loans.
What happens if I don't repay the policy loan?
The unpaid balance and accrued interest are deducted from your death benefit when you die. If the loan balance grows larger than the cash value, the policy can lapse and terminate, and you may owe taxes on the gain.
Is a policy loan better than a credit card or personal loan?
A policy loan usually has a lower interest rate and does not require a credit check. However, it reduces your death benefit and can cause the policy to lapse if left unpaid for many years. A personal loan or credit card may be better if you plan to repay quickly and want to keep your full death benefit intact.
Can I borrow against a policy I just bought?
Not immediately. Cash value takes time to accumulate. In the first year or two, there may be little or no cash value available to borrow. Check your policy statement or call your insurance company to see when cash value becomes available.
Do I need to tell my beneficiaries about a policy loan?
You do not have to, but it is a good idea. If you die with an unpaid loan, your beneficiaries will receive a smaller death benefit than they expected. Letting them know prevents confusion and disappointment.