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 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 loan comes from the insurance company, and you repay it with interest. If you die before repaying, the outstanding loan balance is subtracted from the death benefit your beneficiaries receive.
This is different from withdrawing money. A loan lets you keep the policy in force and the death benefit intact (minus what you owe). A withdrawal reduces both permanently. Most people in a cash crunch choose the loan route because it preserves the coverage.
Key Takeaways
- Only whole life and universal life policies have cash value you can borrow against; term life policies do not.
- The loan amount is limited to a percentage of your cash value, typically 75 to 90 percent, depending on your policy and insurer.
- You pay interest on the loan, and if you die before repaying it, the unpaid balance reduces what your beneficiaries receive.
- The loan process usually takes one to two weeks, and you can use the money for any reason.
How much you can borrow and what it costs
The maximum loan amount is set by your insurance company and is based on your policy's cash value. Most insurers let you borrow 75 to 90 percent of the cash value, though some allow up to 95 percent. If your policy has a cash value of $10,000, you might be able to borrow $7,500 to $9,500, depending on the company and policy type.
Interest rates vary by insurer and policy. Some policies have a fixed loan rate written into the contract (often 5 to 8 percent). Others use a variable rate tied to a market index, which means your rate can change. Ask your insurance company for the exact rate before you borrow, because the interest cost adds up over time if you repay slowly.
You are not required to repay the loan on any schedule. You can pay it back in a lump sum, in installments, or let it sit. However, unpaid interest accrues and is added to the loan balance. If the loan and interest grow larger than your cash value, the policy can lapse and your coverage ends.
The application and approval process
Borrowing from your policy is simpler than getting a traditional loan. You contact your insurance company directly—usually by phone, online portal, or mail—and request a policy loan. You will need your policy number and proof of ownership. No credit check, no employment verification, and no underwriting.
Approval typically takes one to two weeks. The insurance company sends you the loan agreement, which spells out the interest rate, repayment terms (if any), and what happens if you do not repay. You sign and return it, and the funds are deposited into your bank account.
Some insurers offer faster processing if you apply online or by phone. A few can fund the loan within days. Call your insurance company to ask about their timeline and whether expedited options exist.
What happens if you do not repay the loan
Unlike a bank loan, there is no default, no credit damage, and no collection calls. But there are real consequences. Interest keeps accruing on the unpaid balance. If the loan plus interest grows larger than your cash value, your policy lapses and your life insurance ends. You lose the death benefit and any remaining cash value.
If you die while the loan is outstanding, your beneficiaries receive the death benefit minus the unpaid loan balance and any accrued interest. For example, if your death benefit is $100,000, you borrowed $20,000, and $2,000 in interest has accrued, your beneficiaries receive $78,000.
Some policies allow the insurance company to automatically use dividends (if your policy pays them) to pay down the loan balance. Ask whether your policy has this feature, because it can prevent the policy from lapsing if you forget to make payments.
Borrowing versus withdrawing from your policy
A policy loan and a withdrawal are two different things. A loan keeps your policy active and your death benefit in place (reduced by the loan amount). A withdrawal removes money permanently and reduces both your cash value and your death benefit by the amount withdrawn.
Withdrawals are also taxed differently. You can withdraw up to the amount you paid in premiums tax-free. Anything above that is taxable income. Loans are not taxed when you take them out, but unpaid loans can trigger a tax bill if your policy lapses.
If you need money and want to keep your coverage intact, a loan is usually the better choice. If you are considering dropping the policy anyway, a withdrawal might make sense. Talk to your insurance agent or a tax professional about which option fits your situation.
When borrowing from your policy makes sense
A policy loan works well for short-term cash needs—medical bills, home repairs, or temporary income loss—when you plan to repay within a few years. The process is fast, there is no credit check, and you avoid high-interest credit cards or personal loans.
It is less suitable if you need the money long-term or cannot repay it. Unpaid interest compounds, and if the loan grows too large, your policy dies and you lose the death benefit. If your beneficiaries depend on that benefit, borrowing puts them at risk.
Consider also whether you still need the life insurance. If your situation has changed and you no longer need the coverage, surrendering the policy and withdrawing the cash value might be simpler than taking a loan you may not repay.
Frequently Asked Questions
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 build cash value over time. If you need money and own only term insurance, you would need to explore other options like a personal loan or line of credit.
What if I borrowed money and my policy lapsed?
If your policy lapses because the loan balance exceeded your cash value, your coverage ends and your beneficiaries receive nothing. You may also owe income tax on the amount by which the loan exceeded your premiums paid. Contact your insurance company immediately if you think your policy is at risk of lapsing.
Do I have to tell my beneficiaries I took a loan?
You are not required to tell them, but it is a good idea. Your beneficiaries should know that the death benefit will be reduced by any outstanding loan balance. This prevents confusion or disappointment when they receive less than they expected.
Can I borrow from my policy if I am behind on premiums?
Most insurers allow policy loans even if you are behind on payments, but it depends on your specific policy and company. Some policies have a grace period during which you can still borrow. Contact your insurance company to ask whether you are may be able to access to take a loan in your situation.
Is the interest on a policy loan tax-deductible?
No. Interest paid on a policy loan is not tax-deductible for personal life insurance. If you borrowed for a business purpose, consult a tax professional, as the rules may differ. For most homeowners, the interest is simply a cost of borrowing.