Yes, you can borrow from a permanent life insurance policy, but only certain types let you do it

If you own a whole life or universal life insurance 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 own policy's accumulated value, not from the insurance company lending you new funds — you are essentially borrowing against yourself, though the insurer handles the mechanics and charges interest.

A policy loan is different from surrendering the policy or making a withdrawal. You keep your death benefit in place (though it shrinks by the loan amount if you do not repay), and you do not owe income tax on the borrowed money itself. The catch is that interest accrues, and if you die before repaying, the loan balance comes out of what your beneficiaries receive.

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 approval process — you can usually access the money within days by calling your insurer.
  • Interest rates on policy loans vary by insurer and policy type, typically ranging from 5% to 8%, and interest compounds annually.
  • If you die with an unpaid loan balance, your beneficiaries receive the death benefit minus what you owe, including accrued interest.
  • Borrowed money is not taxed as income, but unpaid loans can trigger a tax bill if the policy lapses while you still owe money.

How much you can borrow and how fast you get it

The amount available to borrow is typically 90% of your policy's cash surrender value — the amount you would receive if you cancelled the policy entirely. If your policy has a $50,000 cash value, you could usually borrow up to $45,000. Some policies allow you to borrow up to 100% of cash value, so check your policy documents or call your insurer to confirm the exact limit.

The process is straightforward because there is no underwriting. You call your insurance company, request a policy loan, and they verify you own the policy and that it has sufficient cash value. Most insurers can send you the money within three to seven business days. Some offer online portals where you can request a loan and receive funds even faster. You do not need to explain what you are using the money for.

Interest rates and how repayment works

Policy loan interest rates are set by your insurance company and are stated in your policy documents. Rates typically fall between 5% and 8%, though some policies have fixed rates and others use a variable rate tied to market conditions. The interest compounds annually, meaning unpaid interest gets added to your loan balance each year, and you then owe interest on that interest.

You are not required to make regular monthly payments. You can repay whenever you want — a lump sum, sporadic payments, or nothing at all during your lifetime. If you do not repay before you die, the outstanding loan balance (including all accrued interest) is subtracted from your death benefit. If the loan balance exceeds your death benefit, the policy may lapse and create a tax problem for your beneficiaries.

Tax consequences of policy loans

Borrowing from your policy is not a taxable event — you do not report the loan as income on your tax return. However, the interest you pay is not tax-deductible, so you bear the full cost without a tax offset.

The real tax risk emerges if your policy lapses while you have an unpaid loan. If you stop paying premiums and the cash value runs out because of the loan balance, the IRS treats the forgiven loan as taxable income. If you borrowed $30,000 and the policy lapses with $25,000 still owed, you could owe income tax on that $25,000 in the year the policy ends. This is a significant gotcha that catches people off guard.

When a policy loan makes sense and when it does not

A policy loan is most useful when you need money quickly and have no other options, or when you want to avoid selling investments that are performing well. Because there is no credit check, it works for people with poor credit or those who cannot may have access to for a traditional loan. The interest rate is usually lower than a credit card or personal loan, though higher than a home equity line of credit.

A policy loan is a poor choice if you are already struggling to pay premiums. Borrowing from the policy while falling behind on premium payments accelerates the risk that the policy will lapse, triggering the tax bomb described above. It is also not a good move if you are counting on the full death benefit to reach your beneficiaries — every dollar you borrow reduces what they receive.

Alternatives to borrowing from your policy

If you own a whole life or universal life policy but want to access cash without a loan, you can make a withdrawal from the cash value. Withdrawals are tax-free up to the amount of premiums you have paid in, but withdrawals above that threshold are taxed as income. Withdrawals also reduce your death benefit permanently and cannot be repaid like a loan can.

You can also surrender the policy entirely and receive its full cash value, though you lose the death benefit and any amount above your total premiums paid is taxable income. Some policies offer a policy sale or viatical settlement if you are terminally ill, which pays you a percentage of the death benefit now.

What happens if you cannot repay the loan

If you stop repaying a policy loan, the insurer does not pursue you for payment the way a bank would. Instead, the unpaid balance simply sits there, accruing interest. Your death benefit shrinks by the loan amount, and when you die, your beneficiaries receive whatever is left after the loan is deducted.

The real danger is policy lapse. If your cash value drops to zero because of the loan balance and you stop paying premiums, the policy ends. At that point, any unpaid loan becomes taxable income to you in that tax year. You could owe a large tax bill with no policy to show for it. To avoid this, you must either repay the loan or keep paying premiums so the cash value does not disappear.

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 whole life and universal life policies accumulate cash value over time. If you own term life and need money, you would have to look at other borrowing options.

Will borrowing from my policy affect my death benefit?

Yes, but only if you do not repay. Your death benefit is reduced by the unpaid loan balance plus accrued interest. If you repay the loan during your lifetime, your beneficiaries receive the full death benefit. If you die with an outstanding loan, they receive the death benefit minus what you owe.

Do I have to pay back a policy loan before I die?

No. You can leave the loan unpaid for your entire life. However, the unpaid balance will be subtracted from your death benefit, and if the loan grows larger than your cash value, the policy may lapse and create a tax bill for you or your estate.

What is the difference between a policy loan and a withdrawal?

A loan must be repaid and accrues interest, but it is not taxed as income. A withdrawal is not repaid, is tax-free up to the amount of premiums you paid, but anything above that is taxable income. Withdrawals also permanently reduce your death benefit.

Can I borrow from my policy if I have missed premium payments?

You can still request a loan, but the insurer will check whether your policy is still active. If you have missed payments and the policy has lapsed, you cannot borrow. If the policy is still in force but at risk of lapsing, borrowing may accelerate that risk by reducing your cash value further.