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 the cash value permanently and can cause the policy to lapse if you take out too much.
Key Takeaways
- Only whole life and universal life policies have cash value you can borrow against; term life policies cannot be borrowed from.
- A policy loan does not require a credit check or income verification, and the interest rate is set by your policy contract.
- Any unpaid loan balance reduces the death benefit your beneficiaries receive dollar-for-dollar.
- If you do not repay the loan and die, the insurance company deducts what you owe before paying out the remaining benefit.
- Loans can cause your policy to lapse if the loan balance plus interest grows larger than your cash value.
How a policy loan actually works
When you request a loan, the insurance company lends you money based on your current cash value. You do not have to prove income or pass a credit check. The interest rate is written into your policy contract and typically ranges from 5 to 8 percent, though this varies by insurer and policy type. Some policies use a fixed rate; others use a variable rate tied to market conditions.
You can usually borrow up to 90 percent of your cash value, though some policies allow less. The loan is processed in days or weeks, not months. You repay on a schedule you choose—some people pay monthly, others pay a lump sum when they can. Interest accrues whether you make payments or not.
The key risk: if your loan balance plus accumulated interest exceeds your cash value, the policy can lapse and terminate. When that happens, you lose the death benefit entirely, and you may owe income tax on the difference between what you borrowed and what you paid in premiums over the years.
What happens to your death benefit
If you die with an outstanding loan, your beneficiaries do not receive the full death benefit. The insurance company subtracts what you owe—both the principal and any unpaid interest—before sending the remaining money to your family.
For example, if your policy death benefit is $250,000 and you have a $40,000 loan with $5,000 in unpaid interest, your beneficiaries receive $205,000. This reduction happens automatically; your family does not have a choice about it.
This is why policy loans are risky if you rely on that death benefit to protect your family. Borrowing reduces what they actually receive, even though the policy is still in force.
Policy loans versus withdrawals
A withdrawal takes cash value out of the policy permanently. You do not repay it. But withdrawals reduce your cash value, which can cause the policy to lapse if you withdraw too much. Withdrawals also may trigger income tax if you withdraw more than the total premiums you have paid into the policy.
A loan lets you access cash while keeping the policy active. You repay with interest, and the cash value stays available for future loans. But unpaid loans can cause the policy to lapse just as easily as large withdrawals.
The choice depends on whether you plan to repay. If you need money temporarily and expect to pay it back, a loan makes sense. If you need permanent access to the cash and do not plan to repay, a withdrawal may be simpler—though you should understand the tax consequences first.
When a policy loan makes sense
A policy loan can be useful if you need cash quickly and do not want to take out a personal loan or use a credit card. There is no credit check, no application process beyond contacting your insurer, and the interest rate is lower than most personal loans or credit cards.
Some people use policy loans to cover medical expenses, home repairs, or temporary cash shortfalls. Others borrow to pay premiums on the policy itself when money is tight—though this can become a trap if you keep borrowing and never repay.
Policy loans are less useful if you cannot afford to repay them. If you borrow and the loan balance grows faster than your cash value, the policy will lapse and you lose the death benefit. This is especially risky if your family depends on that benefit.
The tax consequences of borrowing
A policy loan itself is not taxable income. You are borrowing your own money, not receiving income. However, if you do not repay the loan and the policy lapses or you surrender it, the unpaid loan balance may become taxable.
Specifically, if your policy lapses with an outstanding loan, you may owe income tax on the amount by which the loan exceeds your total premiums paid. This is a surprise tax bill that arrives after the policy is already gone.
If you are considering a large loan, ask your insurance company for a projection showing what happens if you do not repay. They can calculate whether the policy will lapse and what the tax impact might be.
How to request a policy loan
Contact your insurance company directly—call the number on your policy or visit their website. You will need your policy number. Most insurers let you request a loan online, by phone, or by mail.
The company will tell you how much you can borrow based on your current cash value. You specify the amount and how you want the money sent (check, direct deposit, or wire transfer). Processing usually takes three to ten business days.
Before you request the loan, ask the company for the interest rate on your specific policy, the repayment terms available, and what happens if you do not repay. Get this in writing so you understand the full picture.
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 cash and own only term insurance, you would need to explore other borrowing options like a personal loan or home equity line of credit.
What interest rate will I pay on a policy loan?
The interest rate is set by your policy contract and typically ranges from 5 to 8 percent. Some policies use a fixed rate that never changes; others use a variable rate that moves with market conditions. Check your policy document or call your insurer to find out your specific rate.
What happens if I die before I repay the loan?
The insurance company subtracts the unpaid loan balance (including any accrued interest) from your death benefit before paying your beneficiaries. If you borrowed $30,000 and still owe $28,000 when you die, your family receives $28,000 less than the stated death benefit.
Can a policy loan cause my insurance to end?
Yes. If the loan balance plus accumulated interest grows larger than your cash value, the policy will lapse and terminate. When this happens, you lose the death benefit entirely and may owe income tax on the unpaid loan amount. This is why it is important to understand your cash value and repayment ability before borrowing.
Is a policy loan better than a personal loan?
A policy loan has advantages: no credit check, faster approval, and a lower interest rate than most personal loans. But it has a major risk: if you do not repay, your death benefit disappears. A personal loan does not affect your insurance. Choose based on whether you can repay and whether you need that death benefit to protect your family.