You can borrow money from a permanent life insurance policy, but only if it has built up cash value
A policy loan lets you borrow against the cash value your permanent life insurance has accumulated. This is different from a withdrawal — you are borrowing money that you must repay with interest, not taking the cash out permanently. The loan does not require a credit check or approval process the way a bank loan does, because the insurance company is lending you your own money.
Not all life insurance policies allow loans. Term life insurance has no cash value and cannot be borrowed against. Only whole life, universal life, and variable universal life policies build cash value over time, and only those can be used as collateral for a loan.
The amount you can borrow is typically up to 90 percent of your policy's cash value, though some insurers allow up to 95 percent. If you borrow more than you can repay, the loan balance grows with interest and can eventually reduce or eliminate your death benefit.
Key Takeaways
- Policy loans are only available on permanent life insurance (whole life, universal life, or variable universal life), not on term policies.
- You can borrow up to 90 percent of your cash value, and the insurance company charges interest on the loan amount.
- Unpaid loans reduce your death benefit dollar-for-dollar, so if you die before repaying, your beneficiaries receive less.
- Policy loans do not require a credit check or underwriting, and you can receive the money within days.
- If a loan is not repaid and grows large enough, it can cause your policy to lapse and be cancelled.
How the loan process works
Contact your insurance company or agent and request a policy loan. You will need to provide your policy number and specify how much you want to borrow. The insurer will verify your cash value balance and confirm you are within the borrowing limit.
Most insurers send the money within three to seven business days, though some offer expedited options. You receive a loan agreement that states the interest rate, repayment terms, and what happens if you do not repay. Read this carefully — the terms vary by insurer and by policy type.
You are not required to make regular monthly payments the way you would with a bank loan. Instead, interest accrues on the outstanding balance. You can repay the loan in full at any time, or let it sit while interest compounds. If you never repay it, the loan balance is deducted from your death benefit when you die.
Interest rates and what you will owe
The interest rate on a policy loan is set by your insurance company and is stated in your policy contract. Rates vary widely — some policies charge a fixed rate (often between 5 and 8 percent), while others use a variable rate tied to market conditions or the policy's investment performance. A few policies charge no interest at all, though this is rare.
Interest compounds annually, meaning unpaid interest is added to the loan balance each year, and you then owe interest on that interest. If you borrow $10,000 at 6 percent and make no payments, you will owe approximately $10,600 after one year, $11,236 after two years, and so on.
You can repay the loan at any time without penalty. Some people borrow against their policy, repay it within a few months, and pay minimal interest. Others use a policy loan as a long-term source of money and accept the ongoing interest cost as part of their financial plan.
What happens to your death benefit
Your death benefit is reduced by the amount of any outstanding loan. If your policy has a $500,000 death benefit and you have an unpaid $50,000 loan, your beneficiaries will receive $450,000 when you die.
This reduction applies whether the loan is one year old or twenty years old. If you repay the loan before you die, the full death benefit is restored. If you do not repay it, the reduction is permanent from your beneficiaries' perspective.
Some policies allow the death benefit to be reduced by the loan amount, while others reduce it by the loan amount plus accrued interest. Check your policy documents or ask your agent which applies to you.
When a policy loan can cause your policy to lapse
If you borrow heavily and do not repay, the loan balance can grow until it equals or exceeds your cash value. When that happens, your policy may lapse — meaning it is cancelled and no longer in force. You lose your death benefit protection, and you may owe taxes on the loan amount.
This is most likely to happen if you borrow a large amount, make no repayments, and the interest compounds for many years. It can also happen if your cash value shrinks (which can occur with variable universal life policies if investments perform poorly) while your loan balance stays the same or grows.
Your insurance company will typically send you a notice before this happens, giving you time to repay part of the loan or add money to the policy to prevent lapse. But if you ignore the notice, the policy will be cancelled.
Tax consequences of a policy loan
A policy loan itself is not taxable — you are borrowing your own money, not receiving income. However, if your policy lapses while you have an outstanding loan, the loan amount may become taxable income in that year. The amount treated as income is the loan balance minus your total premiums paid into the policy.
If you surrender your policy (voluntarily cancel it) while a loan is outstanding, the same rule applies. The loan is treated as taxable income to the extent it exceeds your cost basis in the policy.
This is a significant tax consequence and a reason to monitor your loan balance and repayment plan. Speak with a tax professional before taking a large policy loan if you are uncertain about the tax impact.
Alternatives to a policy loan
If you need cash, a policy loan is one option, but not the only one. You can also surrender (cancel) your policy and receive the cash value in full, though you lose your death benefit and may owe taxes. You can take a partial withdrawal from some universal life policies, which reduces your cash value and death benefit but does not create a loan you must repay.
You can also keep your policy and borrow money from a bank or credit union instead, using other collateral or relying on your credit. This keeps your life insurance intact and does not risk a policy lapse.
The right choice depends on whether you want to keep your death benefit in force, how much you need to borrow, and whether you can afford to repay the loan. A policy loan makes sense if you want to preserve your coverage and can repay the borrowed amount within a reasonable timeframe.
Frequently Asked Questions
Can I borrow from my life insurance if I have not paid premiums in a while?
If your policy has lapsed (been cancelled due to missed premiums), you cannot borrow against it. If your policy is still active but you have missed recent payments, you may still be able to borrow, though some insurers require your account to be current. Contact your insurance company to confirm your policy status before requesting a loan.
What happens if I die before I repay the loan?
Your death benefit is reduced by the outstanding loan balance. If you borrowed $30,000 and repaid $10,000, your beneficiaries receive the death benefit minus the remaining $20,000 loan balance. The loan is not forgiven at death — it is simply deducted from what your beneficiaries receive.
Can I borrow more than once from the same policy?
Yes. You can take multiple loans against the same policy as long as the total borrowed does not exceed your borrowing limit (usually 90 percent of cash value). Each loan accrues interest separately, and you can repay them in any order or all at once.
Is a policy loan better than a personal loan from a bank?
A policy loan has no credit check and faster approval, but the interest rate may be higher than a bank loan if you have good credit. A policy loan also risks your death benefit if not repaid. A bank loan keeps your insurance intact but requires a credit check and may have stricter repayment terms. Compare the interest rates and your ability to repay before deciding.
What if my policy is with a company that goes out of business?
Life insurance policies are protected by state insurance guaranty funds, which step in if an insurer fails. Your policy and any outstanding loans are typically transferred to another insurer or protected up to state limits. Contact your state's insurance commissioner if you are concerned about your insurer's stability.