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 money comes from your policy's accumulated savings, not from the insurance company as a lender — you are essentially borrowing your own money, though the policy charges interest on the loan.
A policy loan is different from surrendering the policy or withdrawing cash. When you take a loan, the policy stays in force and your death benefit remains active, though the outstanding loan balance will be subtracted from what your beneficiaries receive. You do not have to repay the loan on a fixed schedule, and there is no credit check or approval process in the traditional sense.
The catch is that if you borrow too much and do not repay it, the loan interest can compound and eventually collapse the policy entirely, leaving you without coverage and potentially triggering a tax bill.
Key Takeaways
- Only whole life and universal life policies have cash value you can borrow against; term life policies do not.
- A policy loan lets you access your own money at a rate set by your insurance company, usually between 5 and 8 percent annually.
- You do not have to repay the loan on any schedule, but unpaid interest compounds and can eventually drain the policy's value.
- Any loan balance outstanding at your death reduces the death benefit your beneficiaries receive dollar-for-dollar.
- Borrowing against a policy can trigger income tax if the loan exceeds the total premiums you have paid into it.
How much you can borrow and what it costs
The amount you can 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 with a $500,000 death benefit might have only $50,000 in cash value after five years, depending on the policy type and how long you have held it.
Most insurance companies will let you borrow up to 90 percent of the cash value, though some allow 95 percent. The interest rate varies by company and policy but typically ranges from 5 to 8 percent per year. Some policies have a fixed rate set when you buy the policy; others use a variable rate tied to market conditions. Check your policy documents or call your insurance company to find out your specific rate and maximum borrowing amount.
Interest accrues whether you pay it back or not. If you do not make payments, the unpaid interest is added to the loan balance each year, and you will owe interest on that interest. Over time, this compounding can grow the loan to a point where it exceeds the cash value, which forces the insurance company to cancel the policy to protect itself.
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 the consequences for your insurance are serious. As the loan balance grows with unpaid interest, it eats into the cash value. If the loan ever exceeds the cash value, the insurance company will send you a notice that the policy is at risk of lapsing.
At that point, you have a choice: pay down the loan, make premium payments to rebuild cash value, or let the policy cancel. If the policy lapses, your death benefit disappears, and you lose coverage. You also may owe income tax on the amount by which the loan exceeded your total premiums paid — this is called a taxable gain.
For example, if you paid $30,000 in premiums over the years and borrowed $50,000 against the policy, the $20,000 difference could be taxable income in the year the policy ends. This tax bill can be substantial and unexpected.
Policy loans versus withdrawals and surrenders
You have three ways to access cash value: a loan, a withdrawal, or a surrender. A policy loan keeps the policy active and does not trigger immediate tax, but you pay interest and the loan reduces your death benefit. A withdrawal (also called a partial surrender) lets you take cash without borrowing, but it permanently reduces the cash value and death benefit, and withdrawals above your premiums paid are taxable. A full surrender means you cancel the policy and take all remaining cash value; you lose all coverage and owe tax on gains.
A loan is often the best choice if you need temporary access to cash and want to keep your coverage in place. A withdrawal makes sense if you do not plan to repay the money and want to avoid interest charges. A surrender is a last resort, used only when you no longer need the insurance.
Tax consequences of borrowing
Policy loans themselves are not taxable — you are not receiving income, you are borrowing against your own money. However, if the total amount you have borrowed exceeds the total premiums you have paid into the policy, the excess is treated as taxable income in the year you take the loan or in the year the policy lapses, whichever comes first.
This rule is called the cost basis rule. If you paid $40,000 in premiums and borrow $60,000, you have a $20,000 taxable gain. You will receive a Form 1099-R from your insurance company, and you must report this on your tax return. The tax is owed at your ordinary income tax rate, which could be 22 percent, 24 percent, or higher depending on your bracket.
If your policy lapses or is surrendered while a loan is outstanding, any gain is taxable in that year, even if you did not intend to trigger a tax event. This is why it is important to monitor the loan balance and make sure the policy does not lapse unintentionally.
When borrowing from life insurance makes sense
A policy loan is useful when you need cash for a short-term need and want to avoid selling investments or taking on credit card debt. Because there is no approval process and no credit check, you can access the money quickly — often within days. The interest rate is usually lower than a personal loan or credit card, and you are not creating a new debt obligation with a fixed repayment schedule.
Policy loans also make sense if you are retired and need supplemental income but want to keep your death benefit in place for your heirs. You can take loans gradually over time without cancelling the policy, as long as you manage the loan balance so it does not exceed the cash value.
A policy loan is less useful if you need a large amount of money long-term, if you cannot afford to repay it, or if your policy's cash value is small. If you are considering a loan because you cannot afford your premiums, talk to your insurance company about other options like reducing your death benefit or switching to a lower-cost policy.
How to apply for a policy loan
Contact your insurance company directly — you can usually find the phone number on your policy statement or the company's website. Tell them you want to take a policy loan and provide your policy number. They will tell you the current cash value, the maximum you can borrow, and the interest rate.
The application is simple: you fill out a form, sign it, and submit it. There is no underwriting, no medical exam, and no waiting period beyond processing time. Most companies can deposit the money into your bank account within 5 to 10 business days.
Before you apply, review your policy documents to understand the loan terms specific to your policy. Ask the insurance company whether interest is fixed or variable, whether there are any fees, and what happens if you do not make payments. Get the answers in writing so you have a record.
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 and universal life — accumulate cash value over time. If you need cash and own only a term policy, you would have to surrender it, which means losing your coverage.
What is the difference between a policy loan and a loan against my policy?
A policy loan is money borrowed against the cash value inside your policy. A loan against your policy is when a third-party lender uses your policy as collateral for a separate loan. Policy loans come directly from the insurance company and are simpler. Loans against your policy involve a separate lender and may have different terms and fees.
If I take a policy loan, will my death benefit be reduced?
Yes. Your beneficiaries will receive the death benefit minus any outstanding loan balance. If your death benefit is $500,000 and you have borrowed $100,000 that remains unpaid, your beneficiaries receive $400,000. This is why it is important to repay the loan or monitor it carefully if you want your heirs to receive the full amount.
Can I borrow from my policy if I am behind on premiums?
It depends on your policy and how far behind you are. Some policies allow loans even if premiums are unpaid, as long as the policy has not lapsed. Others require premiums to be current. Contact your insurance company to find out. If your policy has lapsed, you cannot take a new loan, though you may be able to reinstate the policy under certain conditions.
What happens to my policy loan if I die?
The outstanding loan balance is subtracted from your death benefit before it is paid to your beneficiaries. If you borrowed $75,000 and your death benefit is $300,000, your beneficiaries receive $225,000. The loan does not have to be repaid by your heirs — it is settled from the death benefit itself.