Yes, you can borrow against permanent life insurance, but only certain types let you do it
If you own a permanent life insurance policy — whole life, universal life, or variable universal life — you can borrow against the cash value that builds up inside it. Term life insurance has no cash value, so you cannot borrow against it. The loan comes from the insurance company, and you repay it with interest. If you die before repaying, the insurance company subtracts what you owe from the death benefit your beneficiaries receive.
This is different from surrendering the policy, which means cancelling it entirely. A policy loan lets you keep your coverage in place while accessing money. The process is faster than a traditional bank loan because the insurance company already knows your financial situation — they issued the policy.
Key Takeaways
- Only permanent life insurance policies (whole life, universal life, variable universal life) have cash value you can borrow against; term policies do not.
- A policy loan is borrowed from your own cash value, not from the insurance company's funds, so approval is nearly automatic if your policy has enough value.
- Interest rates on policy loans are set by your policy contract and typically range from 5 to 8 percent, though this varies by insurer and policy type.
- Any unpaid loan balance and accrued interest reduce the death benefit your beneficiaries receive, and can cause the policy to lapse if the debt grows larger than the cash value.
- You can repay a policy loan on your own schedule with no fixed deadline, but unpaid interest compounds and can eventually collapse the policy.
How a policy loan actually works
When you take out a policy loan, you are borrowing against the cash value your premiums have built up inside the policy. The insurance company lends you money and uses your cash value as collateral. You do not lose ownership of that cash value — it stays in the policy and continues to earn interest or dividends, depending on your policy type.
The loan itself accrues interest at a rate spelled out in your policy contract. That interest is added to your loan balance each year. You can repay the loan whenever you want — there is no fixed payment schedule or deadline. Some people repay it in a lump sum; others make regular payments. If you never repay it, the balance simply grows as interest compounds.
When you die, the insurance company pays your death benefit to your beneficiaries, but it first subtracts whatever you still owe on the loan plus any unpaid interest. If the loan balance grows larger than your cash value, the policy can lapse, meaning your coverage ends and your beneficiaries receive nothing.
Interest rates and costs you need to know
Policy loan interest rates are not negotiable — they are locked into your contract when you buy the policy. Most policies charge between 5 and 8 percent annually, though some older policies have lower rates and some newer ones may be higher. Universal life policies sometimes tie the interest rate to a market index, so the rate can change year to year.
The interest you pay does not go to the insurance company as profit. Instead, it goes back into your policy's cash value. This means you are essentially paying interest to yourself, though the math is more complex than that because the insurance company is also charging you for the use of the money.
If you borrow $10,000 at 6 percent interest and never repay it, you will owe $10,600 after one year, $11,236 after two years, and so on. That growing balance reduces the death benefit your family receives. If your cash value is only $15,000 and your loan balance reaches $15,000 or more, the policy collapses and you lose all coverage.
When a policy loan makes sense
A policy loan can be useful if you need cash quickly and have no other options. Because the insurance company already holds your cash value as collateral, approval is nearly automatic — you typically do not need a credit check or income verification. You can often get the money within days.
Policy loans also make sense if you want to keep your life insurance in force while accessing money. If you surrendered the policy instead, you would lose all coverage. A loan lets you preserve that protection for your family while solving a short-term cash problem.
Some people use policy loans to pay premiums on the same policy when cash is tight. This keeps the coverage active without forcing you to surrender it. However, if you borrow to pay premiums and never repay the loan, the interest compounds and can eventually collapse the policy anyway.
Risks and reasons to think twice
The biggest risk is policy lapse. If your loan balance plus accrued interest grows larger than your cash value, the policy ends. You lose all coverage, and your beneficiaries receive nothing — not even the cash value, because it was consumed by the loan debt. This can happen silently if you stop paying attention to the policy.
A policy loan also reduces the death benefit your family receives. If you borrow $20,000 and never repay it, your beneficiaries get $20,000 less than the policy promised. If you die while the loan is outstanding, they receive the reduced amount.
Interest compounds if you do not repay. Unlike a traditional loan with a fixed payment schedule, a policy loan has no deadline. This can feel like freedom, but it also means you can ignore the debt indefinitely while it grows. Many people borrow against a policy intending to repay it quickly, then forget about it or cannot afford to repay it, and watch the balance balloon.
Taking a policy loan may also have tax consequences in rare cases. Generally, loans against your own cash value are not taxable, but if the loan exceeds your total premiums paid, the excess may be taxable as income. Your insurance company can tell you whether this applies to your specific policy.
How to request a policy loan
Contact your insurance company directly — call the number on your policy or log into your online account. You will need your policy number. The company will tell you how much cash value you have available to borrow and what the interest rate is on your specific policy.
Most insurers let you borrow up to 90 percent of your cash value, though some allow up to 95 percent. You cannot borrow more than that because the company needs a cushion to protect itself if the loan balance grows.
The application process is simple. You fill out a form, sign it, and the company sends you a check or deposits the money directly into your bank account. There is usually a small fee — typically $50 to $100 — though some companies waive it. The entire process usually takes one to two weeks.
Alternatives to a policy loan
If you need cash, a policy loan is one option, but not the only one. You could surrender the policy and receive its cash value in full, though you would lose all coverage. You could take out a home equity line of credit if you own a home, which often has a lower interest rate than a policy loan. You could ask your employer for an advance on your paycheck, borrow from family, or use a personal loan from a bank or credit union.
If you are struggling to pay premiums, contact your insurance company before taking a loan. Many companies offer premium payment options like extending the payment period or reducing the death benefit temporarily, which can lower your monthly cost without forcing you to borrow.
Frequently Asked Questions
What happens to my policy loan if I die?
The insurance company subtracts your outstanding loan balance and any unpaid interest from the death benefit before paying your beneficiaries. If the loan balance exceeds the cash value, the policy lapses and your beneficiaries receive nothing. This is why monitoring your loan balance matters — you want to ensure the death benefit remains intact for your family.
Can I take out multiple loans against the same policy?
Yes. You can borrow multiple times as long as your total outstanding loans do not exceed 90 percent of your cash value. Each loan accrues interest separately, and the total debt can grow quickly if you are not repaying. Most people take one loan at a time, but the option exists.
Do I have to repay a policy loan before I sell the policy?
If you sell your policy to another person or to a life settlement company, the buyer will require you to repay the loan first, or they will deduct it from the sale price. You cannot transfer a policy with an outstanding loan to someone else without settling the debt.
Will taking a policy loan affect my credit score?
No. A policy loan does not appear on your credit report because it is not a traditional loan from a bank or credit card company. The insurance company does not report it to credit bureaus, so it will not help or hurt your credit score.
What if I cannot repay the loan?
You are not required to repay it on any schedule. The loan simply remains outstanding, interest continues to compound, and the balance grows. However, if the balance grows larger than your cash value, the policy will lapse and you lose all coverage. Contact your insurance company if you are struggling — they may be able to adjust your policy to prevent lapse.