Yes, you can borrow from a permanent life insurance policy, but only certain types let you do it
You can borrow against whole life, universal life, and variable universal life policies — the kinds that build cash value over time. You cannot borrow from term life insurance because it has no cash value to borrow against. The amount you can borrow is typically up to 90 percent of your policy's cash surrender value, though your insurer sets the exact limit.
The loan comes from your insurance company, not from a bank. You borrow against the money your policy has accumulated, and the insurer charges you interest on that loan. If you die before repaying it, the outstanding loan balance is subtracted from the death benefit your beneficiaries receive.
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.
- You can typically borrow up to 90 percent of your policy's cash surrender value, and the insurer charges interest on the loan.
- Any unpaid loan balance reduces the death benefit your beneficiaries receive when you die.
- The loan process usually takes one to two weeks, and you do not have to prove how you will use the money.
- If you do not repay the loan, it can eventually reduce your policy's value to zero and cause the policy to lapse.
How much you can borrow depends on your policy's cash value
Your cash value is the amount of money your policy has accumulated after paying premiums over time. It grows tax-deferred and belongs to you — it is separate from the death benefit. Your insurer will tell you the current cash value if you call or log into your online account.
Most insurers let you borrow up to 90 percent of that cash value. Some allow 95 percent. A few cap loans at a lower percentage or tie the limit to your policy's loan value rather than cash surrender value — the difference matters because loan value can be slightly less. Call your insurer to find out your specific limit before you request a loan.
The amount you can borrow also depends on how long you have held the policy. Policies issued within the last few years may have little or no cash value yet. Policies you have held for 10 or 20 years typically have substantial cash value. If you are unsure whether your policy has built enough value to borrow against, your insurer can tell you in one phone call.
Interest rates and repayment terms vary by insurer and policy type
Your insurer sets the interest rate on policy loans. Rates typically range from 5 to 8 percent, though some policies have fixed rates written into the contract and others use variable rates that change annually. Check your policy documents or call your insurer to learn what rate applies to your specific policy.
You are not required to repay the loan on a set schedule. You can repay it all at once, make monthly payments, or let it sit unpaid. However, unpaid interest accrues and is added to your loan balance. If the loan balance plus accrued interest grows larger than your policy's cash value, your policy can lapse — meaning it terminates and you lose coverage.
Some policies have a provision that automatically pays the loan interest from your cash value each year if you do not pay it yourself. Others do not. Read your policy or ask your insurer whether interest is automatically deducted, because if it is not and you ignore the loan, the balance can grow quickly.
The loan process is usually faster than a bank loan
To request a loan, contact your insurance company directly — by phone, mail, or through their online portal if available. You will need to provide your policy number and the amount you want to borrow. You do not have to explain what you need the money for.
The insurer will verify your policy is in force, calculate your available loan amount, and send you loan documents to sign. The entire process typically takes one to two weeks. Once you sign and return the documents, the insurer deposits the money into your bank account.
You do not need a credit check, and the loan does not appear on your credit report. Your insurer is not concerned with your credit history or income — they are lending you your own money that is already sitting in your policy.
Borrowing reduces your death benefit and can trigger tax consequences
Any loan balance you have not repaid is subtracted from the death benefit when you die. If you borrowed $50,000 and repaid $20,000, your beneficiaries receive $30,000 less than the policy's stated death benefit. This is the most important trade-off to understand before you borrow.
Loans are generally not taxable income. However, if your policy lapses while you have an outstanding loan, the forgiven loan amount may become taxable income to you in that year. This can happen if unpaid interest causes the loan balance to exceed your cash value and the policy terminates.
If your policy is a Modified Endowment Contract (MEC) — a type that received too much premium too quickly — loans may be treated differently for tax purposes. MEC loans can trigger income tax and a 10 percent penalty if you are under 59½. Ask your insurer whether your policy is an MEC before you borrow.
What happens if you do not repay the loan
If you never repay a policy loan, the unpaid balance and accrued interest remain outstanding. Each year, more interest accrues. Eventually, the loan balance plus interest can grow larger than your policy's cash value. When that happens, your policy lapses and your coverage ends.
Once a policy lapses, you lose the death benefit entirely. Your beneficiaries receive nothing. You also cannot reinstate the policy without passing a new medical exam, and you may be denied if your health has changed.
Some people intentionally let a policy lapse after borrowing against it, treating the loan as a way to access their own cash value without formally surrendering the policy. This works if you no longer need the death benefit, but it is a permanent decision. Make sure you understand the consequences before you let this happen.
Alternatives to borrowing from your policy
If you need cash but want to keep your full death benefit intact, you can surrender your policy and receive its cash value in a lump sum. This ends your coverage permanently, but you receive all the money at once with no interest charges or repayment obligation. Some insurers also offer partial surrenders, letting you withdraw part of the cash value while keeping the policy in force.
You can also explore a policy sale or life settlement if you are over 65 or have a serious health condition. A third party buys your policy and becomes the new owner and beneficiary. You receive a lump sum payment, typically more than the cash surrender value but less than the death benefit. This is permanent and ends your coverage, but it may be worth more than borrowing or surrendering.
If you need short-term cash and want to keep your policy, a personal loan or line of credit from a bank may be cheaper than a policy loan if your credit is good. Compare interest rates before you decide. A policy loan has the advantage of no credit check and no impact on your credit report, but the interest rate may be higher.
Frequently Asked Questions
Can I borrow from 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, and variable universal life — build cash value and allow loans.
What happens to my policy if I borrow against it?
Your coverage stays in force as long as you pay your premiums. The loan does not change your premium amount. However, any unpaid loan balance reduces the death benefit your beneficiaries receive, and if the loan balance grows larger than your cash value, your policy can lapse.
Do I have to pay back a policy loan before I die?
No. If you die with an outstanding loan, the unpaid balance is simply subtracted from the death benefit. Your beneficiaries receive the death benefit minus the loan amount. There is no requirement to repay during your lifetime.
Will borrowing from my policy affect my credit score?
No. Policy loans do not appear on your credit report and do not involve a credit check. They do not affect your credit score or credit history in any way.
Can I borrow from my policy if I have missed premium payments?
It depends on your policy's status. If your policy is in force, you can usually borrow. If your policy has lapsed due to missed payments, you cannot borrow until you reinstate it. Contact your insurer to find out whether your policy is currently active.