Yes, you can borrow against most permanent life insurance policies, but the loan comes from your policy's cash value, not from the insurance company

A policy loan lets you borrow money using the cash value you have built up in a permanent life insurance policy — typically whole life or universal life insurance. The insurance company lends you your own money at a set interest rate, and you repay it on your own schedule. Unlike a bank loan, there is no credit check, no process process, and no approval waiting period. The loan is available within days.

The catch is that this only works if your policy has cash value. Term life insurance has no cash value, so you cannot borrow against it. Permanent policies accumulate cash value over time as you pay premiums, and that cash value is what you borrow against.

If you do not repay the loan before you die, the insurance company subtracts what you owe from the death benefit your beneficiaries receive. If the loan balance grows larger than the cash value itself — which can happen if you borrow a lot and do not repay — your policy can lapse and coverage ends.

Key Takeaways

  • Policy loans are available only on permanent life insurance (whole life, universal life, variable universal life), not on term life insurance.
  • You borrow against your policy's cash value at an interest rate set in your policy contract, typically between 5 and 8 percent.
  • There is no credit check or formal approval process — you can usually access the money within a few days by calling your insurance company.
  • Any unpaid loan balance is subtracted from your death benefit, and if the loan grows larger than your cash value, your policy can terminate.
  • You can repay the loan on any schedule you choose, including making no payments at all, though interest continues to accrue.

How the loan amount and interest rate work

The maximum you can borrow is usually 90 percent of your policy's cash value, though some policies allow up to 95 percent. Your insurance company will tell you the exact cash value when you request a loan. If your policy has a cash value of $10,000, you might be able to borrow up to $9,000 or $9,500.

The interest rate is written into your policy contract when you buy it. It does not change based on your credit or the current market — it is fixed. Rates typically range from 5 to 8 percent, but you should check your policy documents or call your insurance company to find out your exact rate. The interest accrues monthly and is added to your loan balance.

You do not have to make regular monthly payments. You can repay the entire loan at once, make payments whenever you want, or let it sit and accrue interest. However, if the loan balance plus accrued interest grows larger than your cash value, the policy can lapse. When that happens, your coverage ends and you lose the death benefit entirely.

The difference between a policy loan and a policy surrender

A policy loan and a policy surrender are two different ways to access cash from your life insurance, and they have very different consequences. With a policy loan, you keep your coverage in place and borrow against the cash value. With a surrender, you cancel the policy and take the cash value as a lump sum. Once you surrender, there is no death benefit for your beneficiaries.

A surrender also triggers a tax bill if your cash value is larger than the total premiums you have paid. A policy loan does not create a tax event — you are borrowing your own money, not withdrawing it. You only owe taxes if you do not repay the loan and it is forgiven, or if the policy lapses while you still owe money.

If you think you might need the death benefit in the future, a loan is the safer choice. If you are certain you no longer need life insurance, a surrender might make sense, but talk to a tax professional first because the tax consequences vary based on your policy type and how long you have owned it.

What happens to your death benefit if you have an unpaid loan

When you die, the insurance company pays your beneficiaries the death benefit minus whatever you still owe on the loan. If your death benefit is $100,000 and you have an unpaid loan balance of $15,000, your beneficiaries receive $85,000.

This is why an unpaid loan can become a serious problem. If you borrow heavily and do not repay, the loan balance grows with interest. If it reaches or exceeds your cash value, the policy lapses — meaning your coverage ends when ready and there is no death benefit at all. Your beneficiaries receive nothing, and any remaining loan balance is written off.

You can avoid this by monitoring your loan balance and either repaying it or keeping it small enough that it never exceeds your cash value. Some insurance companies will send you a notice if your loan is approaching the danger zone, but you should not rely on that. Check your policy statement annually or call your insurance company to confirm your cash value and loan balance.

How to request a policy loan

Contact your insurance company directly — the phone number is on your policy or on the company's website. Tell them you want to request a policy loan and they will ask you how much you want to borrow. They will confirm your cash value and tell you the maximum available. Some companies let you request the loan online through your account portal.

The company will send you loan documents to sign. These spell out the loan amount, the interest rate, the terms, and what happens if you do not repay. Read them carefully, especially the section on what happens if your policy lapses. Once you sign and return the documents, the money is usually deposited into your bank account within three to five business days.

You do not need to explain why you want the loan or provide financial information. The insurance company does not care what you use the money for. They are lending you your own cash value, so there is no underwriting or credit check.

Tax consequences of a policy loan

A policy loan itself is not taxable. You are borrowing money, not earning income, so the IRS does not treat it as income. However, if you do not repay the loan and it is forgiven — or if your policy lapses while you still owe money — the forgiven amount may be taxable as income.

There is also a special rule called the tax basis rule. If your total policy loans ever exceed the premiums you have paid into the policy, the excess is taxable as income in the year it happens. For example, if you have paid $20,000 in premiums and you borrow $25,000, the extra $5,000 is taxable income.

This is a complex area and the rules vary depending on whether your policy is classified as a modified endowment contract (MEC). If you are considering a large loan, talk to a tax professional or your insurance agent before you proceed. They can tell you whether your specific policy will trigger a tax bill.

Alternatives to a policy loan

If you need cash and you own a permanent life insurance policy, a policy loan is one option, but not the only one. You could surrender the policy and take the cash value, though you lose coverage and may owe taxes. You could also take out a traditional bank loan or use a credit card, though those come with credit checks and higher interest rates.

If you own a term life policy and need cash, you cannot borrow against it because it has no cash value. Your options are to explore for a personal loan from a bank or credit union, use a credit card, or borrow from family. Some employers offer emergency loans against your paycheck, which is another route.

Before you borrow against your life insurance, ask yourself whether you still need the death benefit. If you do, a policy loan keeps your coverage in place. If you do not, surrendering the policy might be simpler than taking out a loan you have to repay. If you are unsure, talk to your insurance agent or a financial advisor about what makes sense for 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 like whole life and universal life build cash value. If you need cash and own a term policy, you would need to explore for a personal loan or use another source of funds.

What happens if I die with an unpaid policy loan?

Your beneficiaries receive the death benefit minus the unpaid loan balance. If you owe $20,000 on a $100,000 policy, they get $80,000. If the loan balance grows larger than your cash value, your policy lapses and there is no death benefit at all.

Do I have to repay a policy loan?

Technically no — you can let it sit indefinitely. However, interest accrues monthly and adds to your balance. If the balance ever exceeds your cash value, your policy terminates. You also lose the death benefit for your beneficiaries. It is safer to repay the loan or keep it small.

Will borrowing against my policy affect my credit score?

No. A policy loan does not appear on your credit report because it is not a traditional loan. There is no credit check and no reporting to credit bureaus. It is purely between you and your insurance company.

Can I borrow against my policy more than once?

Yes. You can take out multiple loans against the same policy as long as the total does not exceed your available cash value. However, each loan accrues interest, so your total balance grows. Monitor your cash value carefully to make sure the combined loans do not cause your policy to lapse.