Yes, you can borrow from 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 has no cash value, so borrowing is not an option. The money comes from your own policy's accumulated value — you are not borrowing from the insurance company's general funds. The loan is secured by your death benefit, which means if you die before repaying it, the outstanding balance is subtracted from what your beneficiaries receive.
A policy loan is different from surrendering the policy for cash. When you take a loan, the policy stays in force and continues to build value. When you surrender it, the policy ends and you get whatever cash value remains, but you lose all death benefit protection.
Key Takeaways
- Only whole life and universal life policies have cash value you can borrow against; term life policies do not.
- You can typically borrow up to 90 percent of your cash value, though the exact amount depends on your specific policy and insurer.
- Policy loans charge interest, which varies by insurer and policy type, and unpaid interest is added to the loan balance each year.
- If you die with an outstanding loan, your beneficiaries receive the death benefit minus whatever you still owe.
- Borrowing does not require a credit check or approval process — you have the right to borrow as long as sufficient cash value exists.
How much you can borrow and what it costs
The amount available to borrow depends on how much cash value your policy has accumulated. Most insurers allow you to borrow between 75 and 90 percent of that cash value. A newer policy may have little or no borrowing capacity; an older policy with decades of premiums paid will have more. You can contact your insurance company or check your most recent policy statement to see the current cash value.
Interest rates on policy loans vary by insurer and by policy type. Some policies have a fixed rate set when you bought the policy — this rate is written into your contract and does not change. Others use a variable rate that adjusts annually based on market conditions. Rates typically range from 5 to 8 percent, though this varies. Any unpaid interest is added to your loan balance each year, so the total amount owed grows if you do not make payments.
Unlike a bank loan, there is no formal approval process. You have a contractual right to borrow against your cash value. You straightforward contact your insurance company, request the loan amount, and the funds are usually sent to you within one to two weeks. No credit check or income verification is required.
What happens if you do not repay the loan
If you never repay a policy loan, the outstanding balance — including all accumulated interest — is deducted from your death benefit when you die. Your beneficiaries receive the remaining amount. For example, if your death benefit is $100,000, you borrowed $30,000, and interest brought the total owed to $35,000, your beneficiaries would receive $65,000.
If the loan balance grows large enough to equal or exceed your cash value, the policy may lapse and terminate. When a policy lapses, you lose all death benefit protection and the policy ends. This can happen if you stop paying premiums and the cash value is consumed by unpaid loan interest. Once a policy lapses, it cannot be reinstated in most cases.
The difference between a policy loan and a withdrawal
Some permanent life policies also allow you to withdraw cash directly rather than borrow it. A withdrawal is permanent — that money is gone and does not need to be repaid. A loan must be repaid, but the cash value remains in the policy and continues to grow. Withdrawals reduce your death benefit dollar-for-dollar, while a loan does not reduce the stated benefit (though the benefit is reduced by the loan balance if you die before repaying).
Withdrawals are also taxed differently. If you withdraw more than you have paid in premiums, the excess is treated as taxable income. Policy loans are generally not taxed when you take them out, though this can change if the policy lapses or if you have borrowed more than your total premiums paid. The tax treatment is complex and depends on your specific situation, so discussing this with a tax professional before withdrawing or borrowing large amounts is wise.
When borrowing from your policy makes sense
A policy loan can be useful when you need cash quickly and have no other options. Because there is no approval process and no credit check, you can access the money faster than through a bank loan or line of credit. The interest rate is often lower than a credit card or personal loan, especially if your policy has a fixed rate locked in years ago.
Policy loans also make sense if you want to keep your insurance in force. If you surrendered the policy to get cash, you would lose all death benefit protection. A loan lets you access money while maintaining coverage for your family. However, if you are borrowing because you cannot afford your premiums, borrowing may only delay the problem — you still have to pay premiums, and now you also have to repay the loan.
Risks and drawbacks to consider
The main risk is that unpaid interest compounds over time. If you borrow $20,000 at 6 percent interest and make no payments, you owe $21,200 after one year, $22,472 after two years, and so on. The debt grows faster the longer you wait. If the loan balance eventually exceeds your cash value, your policy lapses and you lose all protection.
Another drawback is that borrowing reduces the legacy you leave behind. If your goal is to provide money to your family after you die, every dollar you borrow is a dollar your beneficiaries do not receive. A policy loan is a trade-off between accessing money now and having less to pass on later.
If you are considering borrowing to pay premiums on the same policy, be cautious. This can create a cycle where you borrow to pay premiums, the loan balance grows, and eventually the policy lapses. In this situation, it is often better to stop paying premiums and let the policy end rather than borrow against it.
How to request a policy loan
Contact your insurance company directly — you can find the number on your policy statement or the company's website. Tell them you want to request a policy loan and have your policy number ready. They will tell you how much cash value you have and how much you can borrow. You can usually request the loan online, by phone, or by mail.
The insurance company will send you loan documents to sign. Review the interest rate, repayment terms, and any conditions. Once you sign and return the documents, the funds are typically sent within one to two weeks. Some insurers offer the option to have the money deposited directly to your bank account.
Before you request the loan, ask the insurance company about the interest rate on your specific policy, whether it is fixed or variable, and what happens if you make partial payments. Also ask whether there are any fees for taking out the loan. Most insurers do not charge origination fees, but policies vary.
Frequently Asked Questions
Can I borrow from a term life insurance policy?
No. Term life insurance provides only a death benefit and builds no cash value. Only permanent policies — whole life and universal life — accumulate cash value that you can borrow against. If you own a term policy and need cash, your only option is to surrender it, which ends your coverage.
What if I cannot repay the loan before I die?
The outstanding loan balance, including any unpaid interest, is subtracted from your death benefit. Your beneficiaries receive the remaining amount. If the loan balance equals or exceeds your cash value, the policy may lapse and your beneficiaries receive nothing.
Do I have to pay taxes on a policy loan?
Generally, no — policy loans are not taxed when you take them out. However, if the loan balance exceeds your total premiums paid, or if the policy lapses while you have an outstanding loan, the excess may become taxable income. A tax professional can advise you on your specific situation.
Can I borrow from my policy if I have missed premium payments?
It depends on your policy's terms and how far behind you are. If your policy has lapsed due to missed payments, you cannot borrow from it. If the policy is still in force but you are behind on premiums, contact your insurer — some allow loans even when premiums are overdue, though the loan may be used to catch up on payments.
Is a policy loan better than a credit card or personal loan?
A policy loan often has a lower interest rate than a credit card and requires no credit check or approval process. However, it reduces your death benefit and can cause your policy to lapse if the loan balance grows too large. A personal loan or line of credit may be better if you can may have access to and want to keep your full death benefit intact.