You can borrow money from a permanent life insurance policy, but only if it has cash value
A policy loan lets you borrow against the cash value your permanent life insurance policy has built up. You're borrowing your own money that the insurance company is holding, not taking out a new loan. The insurance company charges you interest on the borrowed amount, and if you don't repay it, the unpaid balance and interest are subtracted from your death benefit when you die.
Term life insurance has no cash value, so you cannot borrow against it. Only permanent policies — whole life, universal life, and variable universal life — accumulate cash value over time. The amount you can borrow is usually up to 90 percent of your policy's cash value, though this varies by insurer and policy type.
A policy loan is different from surrendering your policy (cashing it in completely). With a loan, your coverage stays in place as long as you keep paying premiums. The borrowed amount just reduces what your beneficiaries receive when you die, unless you repay the loan first.
Key Takeaways
- Policy loans are only available on permanent life insurance policies that have built up cash value, not on term life insurance.
- You can typically borrow up to 90 percent of your policy's cash value, and the insurance company charges interest on the loan.
- Any unpaid loan balance and interest are deducted from your death benefit, reducing what your beneficiaries receive.
- The loan process usually takes one to two weeks, and you can repay it on your own schedule without a fixed deadline.
- If your policy lapses because you stop paying premiums, any outstanding loan balance becomes taxable income.
How much you can borrow and what it costs
The maximum loan amount depends on your policy's current cash value. Most insurers let you borrow between 75 and 90 percent of that value. If your policy has $50,000 in cash value and your insurer allows 90 percent loans, you could borrow up to $45,000.
Interest rates on policy loans vary. Some policies have a fixed rate set when you bought the policy — often between 5 and 8 percent. Others use a variable rate that changes with market conditions, typically the prime rate plus a percentage point or two. Check your policy documents or call your insurance company to find out which type you have and what the current rate is.
The interest you pay goes back into your policy's cash value, so in a sense you're paying interest to yourself. However, the interest still costs you money because it reduces the net amount you keep if you eventually surrender the policy, and it reduces your death benefit if you don't repay the loan.
The process for taking out a policy loan
Contact your insurance company directly — through their website, phone line, or your agent. You'll need your policy number. The company will tell you your current cash value and the maximum you can borrow. You then request a specific loan amount.
The insurer will send you loan documents to sign. These spell out the interest rate, repayment terms (if any), and what happens if you don't repay. Most policy loans have no set repayment schedule — you can repay whenever you want, in any amount. Some policies do require minimum annual payments or interest-only payments; check your documents.
The money typically arrives in your bank account within one to two weeks. During that time, your policy remains active and your coverage continues as long as you keep paying your regular premiums.
What happens if you don't repay the loan
If you never repay a policy loan, the unpaid balance plus accumulated interest is subtracted from your death benefit. If you borrowed $30,000 and never repaid it, and interest brought the total to $35,000, your beneficiaries would receive $35,000 less than the policy's face value.
If the loan balance plus interest grows to equal or exceed your policy's cash value, the policy can lapse (end). When a policy lapses, you lose coverage and any remaining loan balance becomes taxable income to you in that year. This can create a large unexpected tax bill.
Some insurers offer automatic premium loans, which means if you miss a premium payment, they'll automatically loan you the money from your cash value to keep the policy active. This prevents lapse but increases your loan balance. Check whether your policy has this feature.
Tax consequences of a policy loan
Policy loans themselves are not taxable income — you're borrowing your own money. However, if your policy lapses or is surrendered while you have an outstanding loan, the situation changes. Any loan balance that exceeds your total premiums paid becomes taxable income in the year the policy ends.
For example, if you paid $20,000 in premiums over the years, borrowed $25,000, and never repaid it, then surrendered the policy, you'd owe income tax on $5,000 (the amount the loan exceeded your premiums). The tax rate depends on your overall income and tax bracket.
If you're considering a policy loan and have concerns about tax consequences, speak with a tax professional or your insurance agent. They can walk through the numbers specific to your situation.
Policy loans versus other borrowing options
A policy loan is one way to access cash, but it's not always the best option. A personal loan from a bank or credit union typically has a faster approval process and a fixed repayment schedule, which some people prefer. A home equity line of credit (if you own a home) often has a lower interest rate than a policy loan.
The advantage of a policy loan is that there's no credit check, no income verification, and no formal application process beyond contacting your insurer. If you have poor credit or irregular income, a policy loan may be easier to obtain. You also keep your life insurance coverage in place, whereas taking out other loans doesn't affect your insurance.
The disadvantage is that borrowing reduces your death benefit and can cause your policy to lapse if the loan grows too large. If you're borrowing because you're in financial distress, a policy loan might delay a larger problem rather than solve it.
When a policy loan makes sense
A policy loan works best when you need short-term cash and plan to repay it relatively quickly. Examples include covering an unexpected medical bill, making a down payment on a car, or bridging a gap between jobs. If you repay within a year or two, the interest cost is manageable and your death benefit stays mostly intact.
A policy loan is less suitable if you're in ongoing financial trouble and don't see a clear path to repayment. Borrowing against your life insurance in that situation just postpones the problem and erodes the protection your policy was meant to provide.
If you're considering surrendering your policy entirely to access the cash value, a policy loan is usually better because it preserves your coverage. You can always surrender later if circumstances change.
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 — build cash value over time. If you need cash and have term insurance, you would need to explore other borrowing options.
What happens to my death benefit if I take out a policy loan?
Your death benefit is reduced by the unpaid loan balance plus any accumulated interest. If you borrowed $20,000 and never repaid it, your beneficiaries would receive $20,000 less (plus interest) than the policy's face value. Repaying the loan restores the full death benefit.
Do I have to repay a policy loan on a set schedule?
Most policies have no required repayment schedule — you can repay whenever you want, in any amount. Some policies require minimum annual payments or interest-only payments. Check your policy documents or contact your insurer to learn what applies to yours.
Will taking a policy loan affect my credit score?
No. A policy loan doesn't involve a credit check or a credit report, so it won't show up on your credit history or affect your credit score. The loan is between you and your insurance company only.
What if I can't repay the loan before I die?
The unpaid loan balance and interest are subtracted from your death benefit. Your beneficiaries still receive the remaining amount, but it will be less than the full face value of the policy. This is why it's important to consider whether you can repay before taking out a large loan.