Yes, you can borrow from a permanent life insurance policy, but only certain types allow it
If you own a whole life, universal life, or variable universal life policy, you can borrow against the cash value that has built up inside it. Term life insurance has no cash value, so borrowing is not an option. The amount you can borrow is typically up to 90 percent of your cash value, though your specific policy may allow less or more — check your policy document or call your insurance company to find out the exact percentage.
A policy loan works differently from a traditional bank loan. You are borrowing your own money that sits in the policy, not money the insurance company is lending you from their reserves. The insurance company charges you interest on the loan, usually at a rate set in your policy contract. That rate varies by insurer and by when your policy was issued — older policies sometimes have lower rates than newer ones.
The loan does not require a credit check, and you do not have to prove income or employment. The insurance company already knows everything about you from your original process. You can receive the money within days in most cases.
Key Takeaways
- Only permanent life insurance policies (whole life, universal life, variable universal life) have cash value you can borrow against; term life policies cannot be borrowed from.
- You can typically borrow up to 90 percent of your cash value, though your specific policy may set a different limit.
- Interest rates on policy loans are set in your contract and vary by insurer and policy age, not by your credit score.
- Any unpaid loan balance and accrued interest reduce the death benefit your beneficiaries receive.
- If you do not repay the loan before you die, the insurance company deducts what you owe from the payout to your beneficiaries.
How the loan process works
To borrow from your policy, contact your insurance company directly — you can find the phone number on your policy document or billing statement. Tell them you want to take out a policy loan and how much you need. They will verify your cash value, confirm how much you are allowed to borrow, and explain the interest rate that applies to your specific policy.
You will need to sign a loan agreement that states the amount, the interest rate, and any repayment terms your policy includes. Some policies require you to repay the loan within a set number of years; others allow you to carry the loan indefinitely as long as you pay the interest. Read this agreement carefully before signing, because the repayment rules are binding.
Once you sign, the insurance company typically sends the money by check or direct deposit within 3 to 10 business days. Some companies offer faster options if you need the money urgently.
What happens to your death benefit
When you take out a policy loan, your death benefit does not disappear, but it shrinks. The insurance company will subtract whatever you borrowed, plus any unpaid interest, from the amount your beneficiaries receive when you die.
For example, if your policy has a $500,000 death benefit and you borrow $50,000, your beneficiaries will receive $450,000 when you pass away — assuming you have not repaid any of the loan. If you have paid back $20,000 of the loan but still owe $30,000 plus $5,000 in interest, the payout drops to $465,000.
This reduction is permanent unless you repay the loan. If you repay the full amount plus interest before you die, the death benefit returns to its original amount.
Interest rates and repayment terms
Your policy contract specifies the interest rate you will pay on any loan. Rates vary widely depending on when your policy was issued and which insurance company issued it. Policies sold 20 or 30 years ago may have rates between 4 and 6 percent, while newer policies often have rates between 6 and 8 percent. A few companies offer variable rates that change with market conditions.
Interest accrues (builds up) whether or not you make payments. If you borrow $50,000 at 6 percent interest and make no payments, you owe $53,000 after one year, $56,180 after two years, and so on. The longer you carry the loan, the more interest accumulates.
Repayment terms depend on your specific policy. Some policies require you to repay the loan within 10 or 15 years. Others have no set repayment important date — you can carry the loan for the rest of your life as long as the loan balance plus interest does not exceed your cash value. If the loan balance grows larger than your cash value, the policy may lapse (end), and you could face tax consequences.
Tax consequences of policy loans
A policy loan itself is not taxable income. The IRS does not count money you borrow against your own cash value as income in the year you borrow it. However, if the loan balance plus accrued interest ever exceeds the total amount of premiums you have paid into the policy, the excess becomes taxable.
For example, if you have paid $100,000 in premiums over 20 years and you borrow $120,000, the extra $20,000 may be taxable as ordinary income. This is called a policy loan offset, and it only happens in specific situations — usually when you have borrowed heavily and the policy has not grown much in cash value.
If your policy lapses while you have an outstanding loan, the IRS may treat the unpaid loan balance as a taxable distribution. Consult a tax professional before taking a large loan if you are unsure whether this could affect you.
Alternatives to borrowing from your policy
If you need cash but want to keep your full death benefit intact, you have other options. You can surrender (cancel) your policy and receive its cash value in a lump sum, though this ends your life insurance coverage. You can also do a partial surrender, which means withdrawing some cash value while keeping the policy active with a reduced death benefit.
A policy surrender is taxable if the cash value you receive exceeds the premiums you paid. A partial withdrawal works the same way — you pay tax only on the amount above your total premiums. These options are permanent: once you withdraw cash, that money is gone and the death benefit is reduced by that amount.
If you need money but want to preserve your life insurance, a policy loan is usually better than a surrender because you can repay it and restore the full death benefit. However, if you are certain you will not repay the loan, a surrender or withdrawal might make more sense because you avoid accumulating interest.
When a policy loan might not be available
Some policies restrict when you can take a loan. Many insurance companies do not allow loans during the first year the policy is in force. Others require you to have held the policy for at least two years before borrowing.
If your policy is very new or your cash value is very small, the insurance company may decline your loan request or offer you less than you asked for. Policies with outstanding loans sometimes have limits on how much additional debt you can take on.
If your policy is a modified endowment contract (MEC) — a type of permanent policy that was funded too quickly — loans are treated differently for tax purposes and may trigger unexpected tax bills. Ask your insurance company whether your policy is an MEC before taking a loan.
Frequently Asked Questions
What is the difference between borrowing from my policy and withdrawing cash value?
A loan lets you keep the cash value in the policy and repay what you borrowed; a withdrawal removes the cash permanently and reduces your death benefit by that amount. Loans accrue interest; withdrawals do not. Loans may have tax consequences only if the balance exceeds your premiums paid; withdrawals are taxable on any amount above your premiums.
Can I borrow from a term life insurance policy?
No. Term life policies have no cash value because they are designed to provide coverage for a set number of years at a low cost. Only permanent policies (whole life, universal life, variable universal life) build cash value and allow borrowing.
What happens if I die with an unpaid policy loan?
Your beneficiaries still receive a death benefit, but it is reduced by the loan balance and any unpaid interest. If you borrowed $40,000 and owe $5,000 in interest when you die, your beneficiaries receive $45,000 less than the original death benefit amount.
Can I borrow more than once from the same policy?
Yes. You can take multiple loans as long as the total amount borrowed does not exceed your cash value limit and your policy allows it. Each loan accrues its own interest, and all outstanding balances reduce your death benefit.
Do I have to repay a policy loan if I stop paying premiums?
If you stop paying premiums, your policy will eventually lapse unless you have enough cash value to cover the premiums automatically. If the policy lapses while you have an outstanding loan, the unpaid balance may become taxable. Some policies allow you to use the cash value to pay both premiums and loan interest, but this depletes your cash value faster.