Yes, you can borrow against a permanent life insurance policy, but only certain types allow it

If you own a whole life or universal life insurance policy, you can borrow against the cash value that has built up inside it. Term life insurance does not have cash value, so you cannot borrow against it. The loan comes from the insurance company, and you repay it with interest — the company does not take the money from your death benefit unless you fail to repay and the loan grows larger than your cash value.

A policy loan is different from surrendering your policy (cashing it in completely). When you take a loan, your coverage stays in place as long as you keep paying your premiums. The borrowed amount sits as a debt against your death benefit, so if you die before repaying it, your beneficiaries receive the death benefit minus what you owe.

The speed and simplicity of a policy loan is its main advantage — you do not need to pass a credit check or prove income the way you would for a bank loan. The insurance company already knows your financial situation from your original process.

Key Takeaways

  • Only whole life and universal life policies have cash value you can borrow against; term life policies do not.
  • A policy loan does not cancel your coverage — your death benefit stays active as long as you pay premiums, though the loan amount reduces what your beneficiaries receive.
  • Interest rates on policy loans are typically lower than personal loans or credit cards, and the rate is set in your policy contract.
  • If you do not repay the loan, the unpaid balance and interest grow and can eventually reduce or eliminate your death benefit.
  • You can borrow only up to the cash value your policy has accumulated, which grows slowly in the early years of a policy.

How much you can borrow depends on your policy's cash value

The amount available to borrow is limited to your policy's cash value — the amount of money that has accumulated inside the policy over time. In the first few years of a whole life policy, cash value builds slowly because most of your premium goes toward the cost of insurance. After five to ten years, the cash value typically grows more noticeably.

You cannot borrow the full cash value in most cases. Insurance companies typically let you borrow 75 to 90 percent of the cash value, depending on your policy and the company's rules. If your policy has a cash value of $10,000, you might be able to borrow $7,500 to $9,000.

To find out your current cash value, contact your insurance company directly or check your most recent policy statement. The statement lists the cash value as of a specific date, and the actual amount may be slightly higher or lower depending on how long it has been since the statement was issued.

Interest rates and repayment terms vary by policy type

Policy loans charge interest, but the rate is usually lower than you would pay on a credit card or personal bank loan. The interest rate is written into your policy contract when you buy the policy — it does not change based on credit scores or market conditions the way a bank loan does.

Whole life policies typically have fixed interest rates set by the insurance company, often ranging from 5 to 8 percent, though this varies by company and when the policy was issued. Universal life policies sometimes have variable rates that can change, so check your policy documents to see whether your rate is fixed or adjustable.

You are not required to make regular monthly payments on a policy loan the way you would on a bank loan. Instead, you can repay whenever you want — you might repay the full amount at once, make regular payments, or let the loan sit unpaid. However, unpaid interest continues to grow and compounds, meaning the amount you owe increases over time even if you do not borrow any additional money.

What happens if you do not repay the loan

If you take out a policy loan and never repay it, the unpaid balance and accumulated interest reduce your death benefit dollar for dollar. If you borrowed $5,000 and the loan grew to $7,000 with interest, your beneficiaries would receive $7,000 less than the original death benefit amount.

In extreme cases, if the loan balance grows larger than your cash value, the insurance company may send you a notice that your policy is at risk of lapsing (ending). At that point, you would need to repay part of the loan or add money to your account to keep the policy active. If you do nothing, the policy ends and your coverage disappears.

A lapsed policy cannot be easily restarted. You would have to reapply for life insurance, which means a new medical exam and possibly higher premiums based on your current age and health. This is why policy loans can be risky if you are not confident you can repay them.

Policy loans versus other ways to access cash from your policy

A policy loan is not the only way to get money from a permanent life insurance policy. You can also surrender the policy (cash it in completely) or take a withdrawal from the cash value. Each option has different tax and coverage consequences.

A withdrawal lets you take out part of your cash value without borrowing. You keep the policy in force, but the death benefit is reduced by the amount you withdraw. Withdrawals are usually tax-free up to the amount of premiums you have paid into the policy, but amounts above that may be taxable as income. Once you withdraw money, you cannot put it back.

A surrender means you cash in the entire policy and end your coverage. You receive the full cash value minus any surrender charges (fees the insurance company charges for ending the policy early). Surrendering is permanent — you cannot restart the same policy later. Any gain above what you paid in premiums is taxable as income.

A policy loan keeps your coverage intact and typically has no tax consequences, which is why it is often the better choice if you need temporary access to cash. However, if you no longer need the coverage, surrendering might make more sense than carrying a policy with an outstanding loan.

Tax treatment of policy loans

Policy loans are generally not taxable income. The IRS treats a loan as a loan, not as income, so you do not report it on your tax return. This is one advantage over withdrawals or surrenders, which can create a taxable gain.

However, if your policy is classified as a modified endowment contract (MEC) — a type of policy that was funded too quickly — the tax rules change. Loans from an MEC policy may be taxable, and you may also owe a 10 percent penalty if you are under age 59½. Ask your insurance company whether your policy is an MEC before taking a loan.

If you die with an outstanding policy loan, your beneficiaries do not owe taxes on the death benefit. The loan amount is straightforward subtracted from the benefit they receive. For example, if your death benefit is $100,000 and you owe $8,000 on a policy loan, your beneficiaries receive $92,000.

When a policy loan makes sense and when it does not

A policy loan is most useful when you need money temporarily and expect to repay it within a few years. Because the interest rate is fixed and usually lower than other borrowing options, it can be cheaper than a credit card or personal loan if you repay quickly.

A policy loan makes less sense if you are unlikely to repay it. If you borrow $10,000 and never repay it, the loan will eventually consume your entire death benefit, leaving nothing for your beneficiaries. In that situation, you would be better off surrendering the policy and using the cash value directly, or exploring other borrowing options.

A policy loan is also not a good choice if you are in poor health or have a short life expectancy. If you die soon after taking the loan, the amount you borrowed will significantly reduce what your family receives. In this case, surrendering the policy might be a better option.

Before taking a policy loan, contact your insurance company and ask for a projection showing how the loan will affect your death benefit over time, especially if you do not repay it. This helps you understand the real cost of borrowing and whether it fits your situation.

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 and universal life — accumulate cash value. If you need money and own only a term policy, you would have to surrender it, which ends your coverage.

What if I take a policy loan and then want to cancel my policy?

You can cancel your policy at any time, but the insurance company will subtract the outstanding loan balance from the cash value you receive. If you borrowed $5,000 and your cash value is $12,000, you would receive $7,000 after the loan is repaid from your surrender proceeds.

Do I have to pay back a policy loan if I move or change insurance companies?

Yes. The loan is attached to your policy, not to a specific location or company. If you surrender the policy or let it lapse, the outstanding loan balance is deducted from whatever cash value remains. You cannot transfer a policy loan to a different insurance company.

How long does it take to get a policy loan?

Policy loans are usually processed within one to two weeks. Because the insurance company already has your information and knows your cash value, there is no underwriting or credit check. You can often request the loan online or by phone and receive the money by check or electronic transfer.

What happens to my policy loan if I stop paying premiums?

If you stop paying premiums, your policy will eventually lapse (end). When that happens, any outstanding loan balance is deducted from your remaining cash value. If the loan is larger than the cash value, you lose all coverage and receive nothing.