You can borrow against permanent life insurance policies, not term policies
Only permanent life insurance — whole life, universal life, and variable universal life — builds cash value that you can borrow against. Term life insurance has no cash value, so there is nothing to borrow. The difference matters because permanent policies cost more but accumulate money over time; term policies are cheaper but expire after a set period with no payout unless you die during that time.
When you borrow from a permanent policy, you are borrowing against the cash value your premiums have built up. The insurance company lends you that money at an interest rate they set, and the loan does not require a credit check or income verification. If you die before repaying the loan, the insurance company deducts what you owe from the death benefit your beneficiaries receive.
The amount you can borrow is typically 50 to 90 percent of your cash value, depending on the policy and the insurance company. You do not have to repay the loan on any fixed schedule — you can take years or pay it back in months — but unpaid interest compounds and reduces your death benefit and cash value over time.
Key Takeaways
- Whole life and universal life policies build cash value you can borrow against; term life policies do not.
- A policy loan does not require a credit check and the insurance company cannot deny it based on your financial situation.
- Any unpaid loan balance and interest are subtracted from the death benefit your beneficiaries receive.
- Interest rates on policy loans vary by company and policy type, typically ranging from 5 to 8 percent annually.
- You can borrow repeatedly from the same policy as long as cash value remains available.
How much cash value you have determines how much you can borrow
Your cash value grows slowly in the first few years of a permanent policy because most of your early premiums go toward the insurance company's costs and commissions. After that, a larger portion of each premium adds to the cash value. The older the policy and the more premiums you have paid, the more cash value accumulates.
You can call your insurance company or check your policy statement to see your current cash value. Most companies let you borrow up to 90 percent of that amount, though some allow less. A few policies have a minimum loan amount — often $500 or $1,000 — so very small loans may not be possible.
If you have a policy that is only a few years old, the cash value may be small or even zero. Policies sold in the last few years often have little to no cash value in the first 5 to 10 years. If you surrender the policy (cancel it) to access the cash value instead of borrowing, you lose the death benefit and may owe income tax on gains above what you paid in premiums.
Policy loans have interest rates and repayment terms you should understand
The interest rate on a policy loan is set by your insurance company and written into your policy contract. Rates typically range from 5 to 8 percent per year, though some older policies have lower rates locked in. The rate does not change based on credit scores or market conditions — it is fixed in your policy documents.
Unlike a bank loan, you have no required repayment schedule. You can pay back the full amount tomorrow or over 20 years. However, interest accrues whether you pay or not. If you do not pay the interest, it is added to the loan balance, and next month's interest is calculated on the larger amount. Over time, this compounds and can significantly reduce your cash value and death benefit.
If the loan balance plus unpaid interest ever exceeds your cash value, the policy can lapse (end). When a policy lapses, you lose the death benefit and may face a tax bill on the difference between your cash value and the total premiums you paid. Some insurance companies send notices before this happens, but not all do.
Taking a policy loan affects your death benefit and taxes
Any loan balance you have not repaid is subtracted from the death benefit. If your policy has a $500,000 death benefit and you borrow $50,000 and never repay it, your beneficiaries receive $450,000. If the loan grows to $100,000 due to unpaid interest, the death benefit is reduced to $400,000.
Policy loans are generally not taxable income when you take them out. However, if you borrow more than the total premiums you have paid into the policy, the amount over your premiums may be taxable. For example, if you paid $30,000 in premiums and borrow $40,000, the extra $10,000 could be taxable income. Your insurance company will send you a form if this applies.
If your policy lapses because the loan balance exceeds the cash value, the forgiven loan amount may become taxable income in that year. This is another reason to monitor your loan balance and either repay it or make sure your cash value stays ahead of what you owe.
Other ways to access cash from a permanent policy
A policy loan is not the only option. You can also surrender the policy and receive the cash value in full, though this ends your death benefit permanently. You can sell the policy to a third party through a life settlement, which typically pays more than the cash value but requires you to give up the death benefit. You can also do a partial withdrawal from some universal life policies, taking out part of the cash value without borrowing.
Withdrawals and surrenders are taxed differently than loans. A withdrawal is taxable on the amount above your total premiums paid. A surrender is also taxable on gains, but you receive the full cash value at once. A life settlement is taxed as capital gains on the difference between the sale price and your cost basis.
A policy loan is often the best choice if you want to keep the death benefit in place and do not need the money permanently. It is also the only option that does not require you to give up the policy or reduce your coverage.
What happens if you do not repay a policy loan
If you never repay the loan, the balance stays on the books and grows with unpaid interest. Your beneficiaries will receive a reduced death benefit — the full amount minus whatever you owe. This is not a problem if you have other assets or if the reduced benefit is still enough for your family's needs.
However, if the loan balance plus interest grows larger than your cash value, the policy will lapse. Once it lapses, there is no death benefit at all, and you may owe income tax on the forgiven loan amount. You cannot restart a lapsed policy; you would have to apply for new insurance, which may be more expensive or denied based on your current health.
Some people intentionally use a policy loan as a way to access their own money without surrendering the policy, planning to repay it later or let it reduce the death benefit. This works if you understand the trade-off. Others take a loan expecting to repay it quickly and then do not, which can create problems years later.
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 over time. If you need to borrow money and have only a term policy, you would need to apply for a personal loan or line of credit elsewhere.
What happens to my death benefit if I borrow against my policy?
Your death benefit is reduced by the loan balance. If you borrow $30,000 and never repay it, your beneficiaries receive $30,000 less than the full death benefit. If the loan grows due to unpaid interest, the reduction is even larger. Repaying the loan restores the full death benefit.
Do I need good credit to get a policy loan?
No. The insurance company does not check your credit score or require a credit application. A policy loan is not based on your creditworthiness — it is based on the cash value in your policy. As long as you have cash value, you can borrow against it regardless of your credit history.
Can the insurance company deny my policy loan request?
No, not if you have sufficient cash value. A policy loan is a contractual right written into your policy. The insurance company cannot deny it based on your income, employment, or financial situation. They can only deny it if your cash value is too low or if the loan would exceed the maximum percentage allowed by your policy.
What interest rate will I pay on a policy loan?
The rate is set in your policy contract and typically ranges from 5 to 8 percent per year. Older policies sometimes have lower rates locked in. The rate does not change based on market conditions or your credit score. Call your insurance company or check your policy documents to find your specific rate.