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 insurance policy, you can borrow against the cash value that has accumulated inside it. Term life insurance has no cash value, so borrowing is not an option. The loan comes from the insurance company, and you repay it with interest. The money is yours to use for any reason — there is no approval process based on what you need it for, and the lender does not check your credit.
The catch is that a loan against your policy reduces the death benefit your beneficiaries receive unless you repay it before you die. If you die with an outstanding loan, the insurance company subtracts what you owe from the payout. You also pay interest on the borrowed amount, which varies by policy and insurer.
Key Takeaways
- Only permanent life insurance policies (whole life and universal life) have cash value you can borrow against; term life policies do not.
- A policy loan does not require a credit check or approval based on income, and you can use the money for any purpose.
- Any unpaid loan balance is subtracted from your death benefit, reducing what your beneficiaries receive.
- Interest rates on policy loans are set by your insurance company and vary; unpaid interest can compound and eventually reduce your death benefit to zero.
- You can repay a policy loan on your own schedule, but the longer you wait, the more interest accumulates.
How much you can borrow depends on your policy's cash value
The amount available to borrow is limited to the cash surrender value of your policy — the amount the insurance company would pay you if you cancelled the policy today. This is not the same as your death benefit. A policy that pays $500,000 when you die might have only $50,000 in cash value after ten years of payments.
Most insurers let you borrow up to 90 percent of the cash value, though some allow 95 percent or even 100 percent. The remaining percentage stays in the policy as a cushion. You can call your insurance company or check your policy statement to find out your current cash value and the maximum you can borrow.
Cash value grows slowly in the early years of a policy. If you bought whole life insurance recently, you may have very little available to borrow. Policies that have been in force for 10, 15, or 20 years typically have more cash value built up.
Interest rates and repayment terms vary by policy
The interest rate on a policy loan is set by your insurance company and is written into your policy contract. Rates typically range from 5 to 8 percent, though this varies. Some policies have a fixed rate; others have a variable rate that can change. You should find the rate in your policy documents or by contacting your insurer.
Unlike a bank loan, there is no set repayment schedule. You can repay the loan whenever you want — in a lump sum, in monthly installments, or not at all during your lifetime. However, any unpaid balance accrues interest. If you do not repay the loan and the interest grows large enough, it can eventually consume the entire cash value and cause your policy to lapse, leaving your beneficiaries with no death benefit.
Some policies allow you to pay interest only, without reducing the principal. Others require you to pay down the principal over time. Check your policy or ask your insurance agent what repayment options are available to you.
Tax consequences of a policy loan
A loan against your life insurance policy is generally not taxable income. The IRS treats it as a loan, not a withdrawal, so you do not owe income tax on the money you borrow. However, this changes if your policy lapses or you surrender it while a loan is outstanding.
If your policy ends and you still owe money on the loan, the unpaid balance may become taxable income. The amount treated as income is the difference between what you borrowed and the cash value remaining in the policy. This can result in a tax bill in the year the policy ends, so it is worth understanding before you take out a large loan.
If you are unsure about the tax impact of borrowing against your specific policy, speak with a tax professional or your insurance agent before you proceed.
Policy loans versus surrendering your policy
If you need cash, you have two main options: borrow against the policy or surrender it and take the cash value. A policy loan lets you keep your death benefit in place (assuming you repay the loan), while surrendering ends the policy entirely.
Surrendering is simpler — you get the cash value in one payment and the policy is done. But you lose the death benefit permanently, and if the cash value is less than the premiums you paid in, you may have a tax bill on the difference. A policy loan keeps your coverage active and lets you repay on your own timeline, but it costs interest and reduces the benefit your beneficiaries receive if you do not repay it.
If you are considering either option, compare the interest rate on a policy loan to what you would pay for other types of borrowing, like a personal loan or home equity line of credit. Sometimes an outside loan is cheaper.
What happens if you do not repay the loan
If you borrow from your policy and never repay it, the loan balance stays on the books and interest continues to accrue. When you die, the insurance company subtracts the unpaid loan and all accumulated interest from your death benefit before paying your beneficiaries. If the loan and interest grow large enough to equal or exceed the cash value, your policy may lapse entirely, leaving nothing for your beneficiaries.
This is one of the biggest risks of a policy loan: it can silently erode your death benefit over time. You might think you have $500,000 in coverage, but if you borrowed $100,000 ten years ago and never repaid it, your actual benefit could be much lower by the time you die.
For this reason, it is important to treat a policy loan seriously. If you borrow, have a plan to repay. If you cannot repay, consider whether keeping the policy makes sense.
How to apply for a policy loan
Contact your insurance company directly — by phone, mail, or their online portal — and ask to take out a policy loan. You will need your policy number. The company will verify your cash value, confirm how much you can borrow, and explain the interest rate and terms.
The process is usually fast. Many insurers can deposit the money into your bank account within a few business days. You do not need to provide a reason for the loan or undergo a credit check. The insurance company already knows everything about you from your original application.
Before you request the loan, ask your insurer for a written explanation of the interest rate, repayment options, and what happens to your death benefit if the loan is not repaid. Having this in writing protects you and makes it easier to track your obligations.
Frequently Asked Questions
Can I borrow from a term life insurance policy?
No. Term life insurance does not build cash value, so there is nothing to borrow against. Only permanent policies — whole life and universal life — accumulate cash value over time and allow loans.
What happens to my death benefit if I take out a policy loan?
The death benefit remains in place, but it is reduced by the unpaid loan balance and any accumulated interest. If you repay the loan, the full death benefit is restored. If you die with an outstanding loan, your beneficiaries receive the death benefit minus what you owe.
Can I borrow from my policy if I have missed premium payments?
It depends on your policy. Some insurers allow loans even if premiums are behind, while others require your account to be current. Contact your insurance company to find out whether you are may be able to access given your payment history.
Is a policy loan better than taking out a personal loan?
It depends on the interest rates and your situation. Policy loans typically have lower interest rates than personal loans and do not require a credit check. However, a personal loan does not reduce your death benefit. Compare the rates and terms of both before deciding.
What if the interest on my policy loan grows larger than my cash value?
If unpaid interest grows large enough to equal or exceed your cash value, your policy will lapse and terminate. You will lose your death benefit entirely. This is why it is important to monitor your loan balance and have a repayment plan.