You can borrow money from a permanent life insurance policy, but not from term insurance

A policy loan lets you borrow against the cash value that builds up in whole life, universal life, and variable universal life policies. Term life insurance has no cash value, so borrowing is not an option. The loan comes from your insurance company, and you're borrowing against your own money that sits in the policy — not against the death benefit itself.

The process is straightforward: you contact your insurance company, request a loan amount, and the money typically arrives within days or weeks. You don't need a credit check or approval based on income. The tradeoff is that any unpaid loan balance reduces what your beneficiaries receive when you die, and interest accrues on the borrowed amount.

Key Takeaways

  • Only permanent life insurance policies (whole life, universal life, variable universal life) have cash value you can borrow against; term policies cannot be borrowed from.
  • A policy loan does not require a credit check or income verification because you are borrowing your own money that the insurance company holds.
  • Interest rates on policy loans are set by your policy and typically range from 5% to 8%, though some policies have fixed rates and others vary with market conditions.
  • Any unpaid loan balance and accrued interest reduce the death benefit your beneficiaries receive, and the loan can eventually consume the entire policy value if left unpaid.
  • You can repay a policy loan on your own schedule with no fixed term, but unpaid interest compounds and can cause the policy to lapse if the cash value runs out.

How the cash value in your policy works

When you pay premiums on a permanent life insurance policy, part of that money goes toward the death benefit and part goes into a cash value account. This account grows over time, either through may provide interest (in whole life policies) or through investment performance (in universal and variable universal policies). The insurance company holds this money, and it belongs to you.

The cash value is separate from the death benefit. If you die, your beneficiaries receive the death benefit, not the cash value. But while you're alive, you can access that cash value in three ways: you can withdraw it, surrender the policy to get the full amount, or borrow against it. A policy loan lets you keep the policy in force while accessing the money.

What happens when you take out a policy loan

When you request a loan, the insurance company lends you money based on your available cash value. Most companies will lend you up to 90% of the cash value, though some allow you to borrow the full amount. You don't have to prove you need the money or what you'll use it for.

The loan is issued as a check or direct deposit, usually within one to three weeks. Interest begins accruing immediately at the rate specified in your policy. If your policy has a variable interest rate, it may change annually based on market conditions or the insurance company's cost of borrowing. You can repay the loan whenever you want — there's no fixed schedule — but any amount you don't repay will continue to accrue interest.

The unpaid loan balance and all accrued interest are subtracted from your death benefit. If you borrow $50,000 and never repay it, your beneficiaries receive $50,000 less (plus whatever interest accumulated). If the loan balance and interest grow to equal or exceed your cash value, the policy lapses and terminates, leaving you with no death benefit and no coverage.

Interest rates and how they're calculated

Policy loan interest rates are set when you buy the policy and are written into the contract. Rates typically range from 5% to 8%, though some older policies have lower rates and some newer policies have higher ones. The rate depends on the type of policy and the insurance company's terms.

There are two common structures: fixed-rate loans, where the interest rate never changes, and variable-rate loans, where the rate adjusts annually based on a published index (often the Moody's Corporate Bond Yield Average). Variable-rate policies usually have a cap — a maximum rate the interest can reach — but the rate can still climb significantly over time if you carry the loan for years.

Interest compounds annually in most policies, meaning unpaid interest is added to the loan balance and earns interest itself. If you borrow $10,000 at 6% and make no payments, after one year you owe $10,600. After two years, you owe $11,236. The longer the loan sits unpaid, the faster it grows.

The tax implications of a policy loan

Policy loans are generally not taxable income. The IRS treats them as loans, not as withdrawals of earnings, so you don't report them on your tax return in the year you take them out. This is different from surrendering a policy or making a withdrawal, which can trigger capital gains tax if the cash value exceeds what you paid in premiums.

However, if you borrow more than the total premiums you've paid into the policy, the excess may be taxable. For example, if you've paid $30,000 in premiums and the cash value has grown to $50,000, borrowing $40,000 means $10,000 of that is earnings and could be taxable. Your insurance company will track this and report it to you.

If the policy lapses while you have an outstanding loan, any forgiven loan balance above your total premiums paid becomes taxable income in that year. This is an important reason to monitor your policy and ensure the loan doesn't grow so large that it causes the policy to fail.

Alternatives to a policy loan

If you need cash, you have other options besides borrowing. You can withdraw money directly from the cash value without taking out a loan. Withdrawals are tax-free up to the amount of premiums you've paid, but withdrawals above that threshold are taxable as income. Withdrawals also reduce your death benefit permanently and can cause the policy to lapse if you withdraw too much.

You can also surrender the policy entirely and receive the full cash value. This terminates your coverage, so you lose the death benefit. If the cash value exceeds your total premiums paid, the excess is taxable. Surrendering makes sense only if you no longer need life insurance or if you're confident you can replace the coverage elsewhere.

A third option is to take out a loan from a bank or credit union instead of from your policy. This keeps your policy intact and your death benefit untouched. However, a bank loan requires a credit check, proof of income, and a fixed repayment schedule. Bank interest rates may be higher or lower than your policy rate depending on your credit and current market rates.

When a policy loan makes sense

A policy loan is most useful when you need cash temporarily and expect to repay it within a few years. Because interest compounds, a long-term loan becomes expensive. If you borrow $25,000 at 6% and repay it over five years, you'll pay roughly $4,000 in interest. Over ten years, you'll pay roughly $9,000.

Policy loans also make sense if you have poor credit or no credit history, because the insurance company doesn't check your credit score. If you can't may have access to for a bank loan, a policy loan may be your only option. The tradeoff is that you're using your own money and reducing your death benefit in the process.

A policy loan is less useful if you need the money long-term or if you're uncertain whether you can repay it. If the loan sits unpaid for years, the interest can eventually consume your entire cash value and cause the policy to lapse, leaving you with no coverage and a tax bill for the forgiven balance.

How to request a policy loan

Contact your insurance company directly — call the customer service number on your policy statement or visit their website. Most companies have an online portal where you can request a loan, or you can call and speak to a representative. You'll need to provide your policy number and the amount you want to borrow.

The company will verify that you have sufficient cash value and that the loan amount doesn't exceed the maximum allowed (usually 90% of cash value). They'll explain the interest rate, repayment terms, and how the loan affects your death benefit. Some companies require you to sign a loan agreement; others process it entirely over the phone or online.

Once approved, the money is typically sent within one to three weeks. You'll receive regular statements showing the loan balance, accrued interest, and your remaining cash value. Keep these statements to track the loan and ensure it doesn't grow out of control.

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, universal life, and variable universal life — build cash value and allow loans.

What happens if I don't repay the policy loan?

The unpaid balance and accrued interest remain outstanding and reduce your death benefit dollar-for-dollar. If the loan and interest grow to equal your cash value, the policy lapses and terminates. You lose coverage, and any forgiven loan balance above your total premiums paid becomes taxable income.

Is a policy loan better than a personal bank loan?

It depends on your situation. A policy loan requires no credit check and has no fixed repayment schedule, making it easier to access. A bank loan may have a lower interest rate if you have good credit, and it doesn't reduce your death benefit. Compare the interest rates and terms before deciding.

Can I borrow more than the cash value in my policy?

No. Most insurance companies allow you to borrow up to 90% of your cash value, and some allow up to 100%. You cannot borrow more than what has accumulated in the policy.

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

No. If you die with an outstanding loan, your beneficiaries receive the death benefit minus the unpaid loan balance and accrued interest. However, leaving a large unpaid loan reduces what your family receives, so repaying it during your lifetime is usually the better choice.