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 a 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 balance grows larger than the cash value itself.
A policy loan is different from surrendering your policy (cashing it out completely). When you borrow, the policy stays in force and your beneficiary can still receive a death benefit — though the amount will be reduced by whatever you still owe on the loan at the time of your death.
Key Takeaways
- Only permanent life insurance policies (whole life and universal life) have cash value you can borrow against; term life policies do not.
- Policy loans typically charge interest, and the rate varies by insurer and policy type, so you should ask your insurance company for the exact rate before borrowing.
- The money you borrow reduces your death benefit dollar-for-dollar unless you repay the loan before you die.
- You can borrow up to the full cash value of your policy, though most people borrow less to keep some death benefit protection in place.
How much cash value you have built up
When you pay premiums on a whole life or universal life policy, part of that money goes toward the insurance cost and part goes into a cash account inside the policy. Over time, this cash value grows — sometimes through may provide interest rates set by the insurance company, sometimes through investment returns if you chose a variable policy.
You can only borrow up to the amount of cash value your policy has accumulated. A brand-new policy may have little or no cash value yet. A policy you have held for many years will have built up more. To find out your current cash value, contact your insurance company or check your most recent policy statement — it will show a line item labeled "cash value" or "cash surrender value."
The cash value grows tax-free as long as the money stays inside the policy. Once you borrow it out, that borrowed amount is no longer growing.
The interest rate and repayment terms
Policy loans are not free. The insurance company charges interest, and the rate depends on your specific policy and the insurer. Some policies have a fixed interest rate set when you bought the policy — this rate is written in your contract. Others have a variable rate that changes based on market conditions or the insurer's cost of borrowing.
You should contact your insurance company and ask for the exact interest rate on your policy before you borrow. Rates can range widely, so knowing the number matters. The company will also tell you whether you must make regular monthly payments or whether you can repay whenever you choose.
Unlike a bank loan, you are not required to repay a policy loan on a set schedule. However, if you do not repay the loan and interest, the balance will grow over time. If the loan balance plus unpaid interest ever exceeds your cash value, the policy can lapse and your coverage will end.
What happens to your death benefit
When you borrow against your policy, your death benefit does not disappear — but it shrinks by the amount you owe. If your policy has a $500,000 death benefit and you borrow $100,000, your beneficiary will receive $400,000 when you die (assuming you have not repaid any of the loan by then).
This is why many people who borrow against their life insurance repay the loan over time. Each dollar you repay increases the death benefit your beneficiary will eventually receive. If you repay the full loan before you die, your beneficiary gets the full original death benefit.
If you die while a loan is outstanding, the insurance company straightforward subtracts what you owe from the death benefit payment. Your beneficiary still receives money — it is just less than the policy promised.
Tax treatment of policy loans
Money you borrow against your life insurance policy is generally not taxable income. The IRS treats it as a loan, not as earnings. You do not report it on your tax return, and you do not owe income tax on the borrowed amount.
However, if you borrow more than the total premiums you have paid into the policy (your "cost basis"), the amount above that threshold may be taxable. This situation is uncommon for most people, but it can happen with older policies that have accumulated large cash values. If you are concerned about this, ask your insurance company to calculate your cost basis before you borrow.
Interest you pay on the loan is not tax-deductible. You pay it with after-tax dollars, just like interest on a personal loan.
Alternatives to borrowing against your policy
If you need cash, borrowing against your life insurance is one option, but not the only one. You could also surrender the policy entirely and receive the full cash value as a lump sum — though this ends your coverage completely. You could take out a traditional bank loan or use a credit card, though these typically charge higher interest rates. You could also explore whether you have other assets you could borrow against, such as a home equity line of credit.
Before you borrow against your policy, think about whether you actually need the coverage. If you no longer need life insurance protection, surrendering the policy and taking the cash value might make more sense than borrowing and keeping the policy in force. If you do need the coverage, borrowing and repaying the loan preserves both your cash and your death benefit protection.
How to request a policy loan
Contact your insurance company directly — call the customer service number on your policy or visit their website. Tell them you want to take out a policy loan and ask how much you can borrow based on your current cash value. The company will explain the interest rate, repayment options, and any fees.
Most insurers can process a policy loan within a few business days. The money is typically sent to you by check or direct deposit. Some companies allow you to request the loan online through your account portal; others require a phone call or written request.
Before you request the loan, have your policy number ready and know approximately how much you want to borrow. The insurance company will confirm that the amount does not exceed your available cash value.
Frequently Asked Questions
What happens if I die before I repay the loan?
Your beneficiary will receive the death benefit minus the outstanding loan balance and any unpaid interest. If you borrowed $50,000 and still owe $45,000 when you die, your beneficiary receives $45,000 less than the original death benefit amount. Repaying the loan during your lifetime restores the full benefit.
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 whole life and universal life policies accumulate cash value over time. If you own term insurance and need cash, you would have to surrender the policy, which ends your coverage.
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 from a bank or credit card company. The insurance company does not report it to credit bureaus, and it does not affect your credit score or credit history.
Can the insurance company refuse to give me a policy loan?
The insurance company cannot refuse a policy loan if you have sufficient cash value. However, if your cash value is very low or zero, there is nothing to borrow against. Some policies also have restrictions on loans during the first year or two after purchase, so check your policy document or call the company to confirm.
What if the interest rate on my policy loan is very high?
You can shop around by checking whether other financial options (a personal loan, home equity line, or credit card) offer better rates. However, remember that a policy loan has advantages: it does not require a credit check, approval is usually quick, and the borrowed amount is not taxable income. Compare the total cost, not just the interest rate.