You can borrow against permanent life insurance, not term life insurance
Only permanent life insurance — whole life, universal life, and variable universal life — builds a cash value that you can borrow against. Term life insurance has no cash value and offers nothing to borrow. The difference matters because permanent policies cost more per month but accumulate money over time that belongs to you; term policies are pure insurance with no savings component.
When you borrow from a permanent policy, you're borrowing against your own cash value, not against the insurance company's money. The loan comes from the policy's accumulated funds, and you pay interest on it. The death benefit stays in place while you have an outstanding loan, though the amount your beneficiaries receive will be reduced by whatever you still owe.
Key Takeaways
- Whole life and universal life policies accumulate cash value that you can borrow against; term life policies cannot be borrowed from because they have no cash value.
- A policy loan lets you access your own cash value without surrendering the policy or losing your death benefit, though the benefit is reduced by the loan amount.
- Interest rates on policy loans vary by insurer and policy type, typically ranging from 5 to 8 percent, and you are not required to repay the loan during your lifetime.
- If you die with an outstanding loan, your beneficiaries receive the death benefit minus the unpaid loan balance and any accrued interest.
- Surrendering a policy for its cash value ends your coverage entirely, whereas a policy loan keeps your insurance active.
How whole life insurance loans work
Whole life insurance is designed to last your entire life and guarantees a fixed monthly premium that never increases. A portion of each premium goes into a cash value account that grows at a rate set by the insurance company. After the policy has been in force for a few years — usually two to three — you can borrow against this cash value.
The loan amount you can take is typically up to 90 percent of your cash value, though some policies allow you to borrow the full amount. You pay interest on the loan, and the rate is usually stated in your policy document. Whole life loans often have lower interest rates than universal life loans because the cash value growth is more predictable and may provide.
You don't have to repay a whole life policy loan while you're alive. If you never repay it, the unpaid balance and interest are simply subtracted from the death benefit your beneficiaries receive. This flexibility is one reason whole life policies are attractive to people who might need access to cash.
How universal life insurance loans work
Universal life insurance offers more flexibility than whole life in how premiums and cash value are structured. You can adjust your monthly premium within limits, and the cash value grows based on current interest rates rather than a may provide rate. This means your cash value can grow faster in high-interest environments but may grow more slowly when rates are low.
Universal life policies also allow you to borrow against the cash value, usually up to 90 percent of it. The interest rate on these loans is typically higher than whole life rates because the cash value is less stable. Some universal life policies charge a variable interest rate that changes with market conditions.
Like whole life loans, you're not required to repay a universal life loan during your lifetime. However, if your policy's cash value drops too low — which can happen if you take large loans or if the policy underperforms — the policy may lapse and your coverage will end. This is a real risk with universal life that doesn't exist with whole life.
The difference between borrowing and surrendering a policy
When you borrow against a policy, your insurance stays active and your beneficiaries still receive a death benefit when you die. The loan is simply subtracted from that benefit. When you surrender a policy, you end the insurance contract entirely and receive the cash value as a lump sum, but you have no more coverage.
Borrowing is usually the better choice if you think you might want your insurance to remain in place. You keep your death benefit protection while accessing cash. Surrendering makes sense only if you're certain you no longer need the insurance and want the full cash value without the obligation to repay anything.
There's also a tax difference. Money you borrow from a policy is not taxable income. If you surrender a policy and the cash value exceeds what you paid in premiums, the excess may be taxable. This is another reason to explore borrowing before surrendering.
Interest rates and repayment terms on policy loans
Interest rates on life insurance policy loans typically range from 5 to 8 percent, though the exact rate depends on your insurer, the type of policy, and sometimes the current interest rate environment. Your policy document should state the rate or explain how it's calculated. Some policies charge a fixed rate; others charge a variable rate that adjusts periodically.
You are not required to repay a policy loan on any particular schedule. You can repay it all at once, make regular payments, or never repay it at all. If you don't repay it, the outstanding balance and accrued interest simply reduce the death benefit your beneficiaries receive. Some people treat policy loans as a permanent withdrawal rather than a debt to be repaid.
If you do repay the loan, the money goes back into your cash value and can be borrowed again. This makes policy loans useful for people who need temporary access to cash but expect to repay it and rebuild their cash value over time.
When a policy loan might cause your coverage to lapse
With whole life insurance, a policy loan is unlikely to cause your coverage to end because the cash value is may provide to grow. As long as you pay your premiums, your policy will remain active even if you have an outstanding loan.
With universal life insurance, the situation is riskier. If you take a large loan and the policy's cash value doesn't grow as expected — or if you stop paying premiums — your cash value can drop below the amount needed to keep the policy in force. When that happens, the policy lapses and your coverage ends. You would then owe income tax on any gain in the policy's value.
Before taking a large loan from a universal life policy, ask your insurance company to show you a projection of how the loan will affect your cash value over time. This helps you understand whether the policy is likely to lapse.
How policy loans affect your death benefit
When you have an outstanding policy loan, your death benefit is reduced by the loan balance plus any accrued interest. For example, if your death benefit is $500,000 and you have a $50,000 loan with $5,000 in accrued interest, your beneficiaries would receive $445,000.
This reduction applies only to the outstanding loan balance. If you repay part or all of the loan before you die, the death benefit increases accordingly. Some people use this feature strategically — they borrow when they need cash, then repay when they're able to, knowing their death benefit will be restored.
It's important to tell your beneficiaries about any outstanding policy loans so they understand what the actual death benefit will be. Many people forget to mention this, and beneficiaries are surprised to receive less than they expected.
Frequently Asked Questions
Can I borrow from a term life insurance policy?
No. Term life insurance has no cash value, so there is nothing to borrow against. Term policies are pure insurance — you pay a premium for coverage during a specific period, but the policy builds no savings component. If you need to borrow money, you would need a permanent policy like whole life or universal life.
What happens if I die with an unpaid policy loan?
Your beneficiaries receive the death benefit minus the outstanding loan balance and any accrued interest. For example, a $250,000 death benefit with a $30,000 unpaid loan would result in a $220,000 payment to your beneficiaries. The loan is settled from the death benefit before any money is paid out.
Do I have to repay a policy loan before I die?
No. You can carry a policy loan for your entire life without repaying it. The unpaid balance simply reduces the death benefit your beneficiaries receive. However, if you want to maximize what your beneficiaries get, repaying the loan during your lifetime is the better choice.
Can I borrow from a policy that's only been in force for a few months?
Most permanent policies require a waiting period — usually two to three years — before you can borrow against the cash value. This is called the surrender charge period. During this time, the cash value exists but is not yet available for loans. Check your policy document for the exact waiting period.
What if I can't repay a policy loan?
You don't have to repay it. The loan simply stays on the books, accrues interest, and reduces your death benefit. However, if the loan balance grows large enough that it exceeds your cash value, your policy may lapse and your coverage will end. This is more likely with universal life than whole life.