Yes, you can borrow from a permanent life insurance policy, but only certain types let you do it
If you have a permanent life insurance policy — whole life, universal life, or variable universal life — you can borrow against the cash value that has built up inside it. Term life insurance does not have this option because it has no cash value. The money you borrow comes from your own cash value, not from the insurance company's pocket, and you pay interest on it just like any other loan.
The loan does not require a credit check or approval process the way a bank loan does. The insurance company will lend you the money because it is already yours — they are straightforward letting you access it early. However, if you die before repaying the loan, the unpaid balance gets subtracted from the death benefit your beneficiaries receive.
Key Takeaways
- Only permanent life insurance policies (whole life, universal life, variable universal life) have cash value you can borrow against; term policies do not.
- A policy loan does not require a credit check, and the insurance company typically approves it within days because the money is already yours.
- You pay interest on the borrowed amount, and the rate varies by policy and company — usually between 5 and 8 percent annually.
- Any unpaid loan balance reduces the death benefit your beneficiaries receive, and unpaid interest can cause the policy to lapse if it grows too large.
- You can repay a policy loan on your own schedule with no fixed important date, but interest keeps accruing until the full amount is repaid.
How much you can borrow depends on your cash value
The amount available to borrow is limited to your cash surrender value — the amount the insurance company would pay you if you cancelled the policy today. This is not the same as your death benefit. A policy with a $500,000 death benefit might have only $50,000 in cash value after five years, depending on how much you have paid in premiums and how the policy has performed.
Most insurance companies let you borrow up to 90 percent of your cash value, though some allow 95 percent or even 100 percent. The remaining percentage stays in the policy to keep it active and protect against the loan interest growing faster than the cash value itself. You can call your insurance company or check your policy statement to find out your exact cash value and the maximum you are allowed to borrow.
The interest rate and repayment terms
Policy loans charge interest, but the rate 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 fixed rates as low as 4 or 5 percent. The interest rate does not change based on credit scores or market conditions the way a personal loan does — it is locked in when you take out the loan.
You do not have to repay the loan on any fixed schedule. The insurance company will not send you a monthly bill or demand payment by a certain date. Interest accrues and gets added to your loan balance each year. If you never repay it, the balance keeps growing, and when you die, the full unpaid amount (including all accrued interest) is subtracted from your death benefit before your beneficiaries receive anything.
What happens if you do not repay the loan
If you borrow $20,000 at 6 percent interest and never repay it, the loan balance grows by $1,200 in the first year alone. Over time, this can become a serious problem. If the loan balance plus accrued interest ever exceeds your cash value, the policy can lapse — meaning it cancels automatically. Once a policy lapses, you lose the death benefit and the remaining cash value, and you may owe taxes on the gains.
The insurance company will usually send you notices warning that your policy is at risk of lapsing, giving you time to repay part of the loan or add money to the policy. But if you ignore those warnings and the loan balance grows unchecked, the policy will terminate. This is why policy loans work best when you have a plan to repay them, even if that plan is flexible.
Tax consequences of a policy loan
A policy loan itself is not taxable income — you are borrowing your own money, not receiving income. However, if the loan balance is still outstanding when you die, the unpaid amount reduces the death benefit, which means your beneficiaries receive less tax-information programs. The interest you pay on the loan is also not tax-deductible the way mortgage interest sometimes is.
If your policy lapses because the loan balance grew too large, you may owe income tax on the difference between what you paid into the policy over the years and what the policy was worth when it cancelled. This is called a taxable gain. The insurance company will send you a form showing this amount, and you will report it on your tax return. Consulting a tax professional before taking a large policy loan can help you understand these potential consequences.
Policy loans versus surrendering the policy
If you need cash, you have two main options: borrow against the cash value or surrender (cancel) the policy and take the cash value as a lump sum. A policy loan lets you keep the death benefit in place — your beneficiaries still have protection even while you owe money. Surrendering the policy gives you access to all the cash value at once, but the death benefit disappears when ready.
A loan also makes sense if you plan to repay it and keep the policy active long-term. Surrendering makes more sense if you no longer need the death benefit or if the policy is costing you more in premiums than it is worth. Some people use a combination: they take a loan to cover when ready expenses and then decide later whether to repay it or surrender the policy.
How to request a policy loan
Contact your insurance company directly — by phone, online portal, or mail — and ask to take out a policy loan. You will need your policy number and the amount you want to borrow. The company will verify that you have enough cash value to support the loan and will explain the interest rate and terms specific to your policy.
Most insurance companies process policy loans within 3 to 7 business days. Some offer expedited processing if you need the money faster. The funds are typically sent to you by check or direct deposit. Before you request the loan, review your policy statement to confirm your current cash value, and ask the company what the loan will cost you in interest over time if you repay it on a specific schedule.
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. Only permanent policies — whole life, universal life, and variable universal life — build cash value over time and allow loans.
What happens to my death benefit if I have an outstanding loan?
The unpaid loan balance, including all accrued interest, is subtracted from your death benefit. If you borrowed $30,000 and still owe $28,000 when you die, your beneficiaries receive $28,000 less than the policy's stated death benefit.
Can the insurance company deny my policy loan request?
The company cannot deny a policy loan if you have sufficient cash value, because the money is contractually yours. However, they can deny the loan if your cash value is too low or if the policy is in default for unpaid premiums.
Do I have to pay back a policy loan before I die?
No. You can carry the loan for your entire life with no repayment important date. However, unpaid interest keeps growing, and if the balance exceeds your cash value, the policy will lapse and you will lose the death benefit.
Is the interest on a policy loan tax-deductible?
No. Policy loan interest is not tax-deductible. The loan itself is not taxable income, but you cannot claim the interest as a deduction on your tax return.