What you can borrow depends on your policy type and cash value

A policy loan lets you borrow money against the cash value your life insurance policy has built up. The amount you can borrow is typically 50 to 90 percent of your policy's cash surrender value — the amount the insurance company would pay you if you cancelled the policy today. Some policies let you borrow up to the full cash value, but most cap it lower to protect themselves if you die before repaying.

Only certain policy types build cash value. Term life insurance has no cash value and offers nothing to borrow against. Whole life, universal life, and variable universal life policies all accumulate cash value over time, and you can borrow against that amount. The older your policy and the more premiums you have paid, the larger the cash value typically grows.

Your insurance company's policy documents spell out the exact borrowing limit. Call your insurer or log into your online account to find your current cash value and maximum loan amount — these numbers change as your policy ages and as you pay premiums.

Key Takeaways

  • You can borrow 50 to 90 percent of your policy's cash value, though the exact limit depends on your specific policy contract.
  • Only permanent life insurance policies (whole life, universal life, variable universal life) have cash value; term policies have none.
  • Interest rates on policy loans are set in your contract and are usually lower than personal loans or credit cards, but you still owe the money back.
  • If you die before repaying a policy loan, the outstanding balance is subtracted from the death benefit your beneficiaries receive.
  • Borrowing against your policy does not trigger a tax bill, but unpaid loans can create tax consequences if the policy lapses.

How the borrowing process works

Requesting a policy loan is straightforward. Contact your insurance company by phone, email, or through their online portal and ask to take out a loan against your cash value. You will need to specify the amount you want to borrow. The company will verify your cash value, confirm you are within the borrowing limit, and process the request.

Most insurers deposit the money into your bank account within 5 to 10 business days. Some companies offer faster processing if you request it, though this may depend on the time of day you submit your request. There is typically no application fee or credit check — the insurance company is lending you your own money, so underwriting is minimal.

Once the loan is approved, you begin accruing interest immediately. The interest rate is written into your policy contract and does not change based on credit scores or market conditions. Rates typically range from 5 to 8 percent, though older policies may have lower rates locked in. You can repay the loan on any schedule you choose — there is no required monthly payment, though unpaid interest compounds over time.

Interest rates and repayment terms

The interest rate on a policy loan is fixed in your contract and was set when you bought the policy. You cannot negotiate it or shop around. Older policies often have lower rates — some from the 1980s and 1990s carry rates of 4 to 6 percent — while newer policies typically range from 6 to 8 percent. A few policies use a variable rate that adjusts annually based on market conditions, so check your documents to see which type you have.

You are not required to make monthly payments. You can repay the entire balance at once, make regular payments, or let the loan sit and pay only interest. However, any unpaid interest is added to the loan balance each year, so the total amount owed grows if you do not pay it down. If you die before the loan is repaid, the full outstanding balance — principal plus accrued interest — is subtracted from the death benefit your beneficiaries receive.

Some policies allow you to take out multiple loans at once, while others limit you to one. Check your policy or ask your insurer about their rules before you borrow.

Tax consequences of policy loans

Taking out a policy loan itself does not create a tax bill. The IRS does not treat it as income because you are borrowing your own money, not receiving a benefit from the insurance company. You can borrow as much as your cash value allows without reporting it to the IRS.

However, tax problems can arise if your policy lapses while you have an outstanding loan. If you stop paying premiums and the cash value runs out, the policy terminates. At that point, the IRS may treat the unpaid loan balance as taxable income to you in the year the policy ends. This can result in a surprise tax bill, especially if the loan is large. To avoid this, either repay the loan before the policy lapses or keep paying premiums so the cash value stays above the loan balance.

If you are borrowing to pay premiums on the same policy — a practice called a policy loan offset — the tax rules are the same: no immediate tax, but potential complications if the policy eventually lapses.

When a policy loan makes sense

A policy loan is useful when you need cash and want to avoid the higher interest rates of credit cards or personal loans. Because the rate is locked into your contract and typically lower than market rates, borrowing against your policy can be cheaper than other options. You also avoid a credit check and the formal application process that comes with traditional lending.

Policy loans work well for short-term needs — covering an unexpected expense, bridging a gap between jobs, or handling a medical bill. They also make sense if you have a large cash value built up and do not expect to need the full death benefit for your beneficiaries.

A policy loan is less suitable if you are relying on the death benefit to protect your family. Borrowing reduces the amount your beneficiaries will receive, so if your primary reason for carrying life insurance is to leave money behind, taking a large loan defeats that purpose. Similarly, if your policy is relatively new and cash value is still small, the loan amount available may not be worth the effort.

What happens if you do not repay the loan

If you never repay a policy loan, the debt does not go away. The unpaid balance and accrued interest remain on the policy until you die or the policy lapses. When you die, the insurance company subtracts the full outstanding loan amount from the death benefit before paying your beneficiaries. If the loan balance is larger than the death benefit — which is rare but possible on older policies with high loan balances — your beneficiaries receive nothing, and the insurance company absorbs the loss.

If the policy lapses because you stop paying premiums, the unpaid loan balance may be treated as taxable income in the year the policy ends. The amount owed becomes a tax liability to you, not to your beneficiaries. This is one reason financial advisors recommend either repaying policy loans or keeping premiums current if you have borrowed against your policy.

Alternatives to borrowing against your policy

Before taking a policy loan, consider whether other options might work better. A personal loan from a bank or credit union may have a higher interest rate, but it does not reduce your death benefit and does not create tax risk if you cannot repay it. A home equity line of credit or home equity loan uses your house as collateral but typically offers lower rates than unsecured personal loans.

A credit card advance or cash advance is usually more expensive than a policy loan but offers flexibility if you need money for only a short time. If you are facing a long-term cash shortage, borrowing against your policy may signal that you need to reassess your budget or your insurance coverage rather than tap into the policy itself.

If you no longer need the life insurance, surrendering the policy and taking the cash value outright is another option — though this eliminates your death benefit and may trigger taxes if the cash value exceeds what you paid in premiums.

Frequently Asked Questions

Can I borrow against a term life insurance policy?

No. Term life insurance has no cash value, so there is nothing to borrow against. Only permanent policies — whole life, universal life, and variable universal life — accumulate cash value over time and allow loans.

What happens to my death benefit if I borrow against my policy?

The death benefit is reduced by the amount of the outstanding loan plus any accrued interest. If you borrow $50,000 and die with $45,000 still owed, your beneficiaries receive $5,000 less than the policy's face amount. If the loan balance exceeds the death benefit, your beneficiaries receive nothing.

Do I have to pay back a policy loan?

You are not legally required to repay it, but unpaid interest compounds annually and reduces your death benefit. If the policy lapses while you have an outstanding loan, the unpaid balance may become taxable income to you in that year.

How long does it take to get a policy loan?

Most insurers process policy loans within 5 to 10 business days. Some offer expedited processing that can deliver funds in 2 to 3 days, though this depends on the company and when you submit your request.

Can I borrow more than once from the same policy?

Some policies allow multiple loans at once, while others limit you to one active loan. Check your policy documents or contact your insurer to learn their rules. Even if multiple loans are allowed, the total amount you can borrow is still capped at your maximum borrowing limit based on cash value.