Yes, you can borrow against a life insurance policy, but only certain types let you do it
You can borrow against permanent life insurance — whole life, universal life, and variable universal life policies. These policies build a cash value component over time, and that cash value is what you can borrow against. Term life insurance does not have a cash value, so borrowing is not an option.
The loan comes from the insurance company, and you are borrowing against your own money that sits in the policy. The process is straightforward: you contact your insurer, request a loan, and they send you the funds. You then repay the loan with interest, just as you would with a bank loan.
The main appeal is speed and simplicity. You do not have to prove income, pass a credit check, or wait weeks for approval. The downside is that any unpaid loan balance reduces the death benefit your beneficiaries receive, and interest accrues whether you pay it back or not.
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 is borrowed against your own cash value, not against the death benefit, and the insurance company charges interest on the amount you take out.
- Any unpaid loan balance and accrued interest reduce the death benefit your beneficiaries receive when you die.
- Policy loans do not require a credit check or income verification, and funds typically arrive within days.
- If a policy loan is not repaid and the balance grows large enough, the policy can lapse and terminate, leaving you with no life insurance coverage.
How much you can borrow depends on your policy's cash value
The amount available to borrow is limited to the cash value your policy has built up. Cash value grows over time as you pay premiums on a permanent policy. In the early years of a whole life policy, cash value is small; it grows larger as the policy ages and as you continue to pay in.
Most insurers let you borrow up to 90 percent of the cash value, though some allow up to 95 or 100 percent. If your policy has a cash value of $10,000, you might be able to borrow $9,000 to $10,000, depending on your insurer's rules. You can find your current cash value on your policy statement or by calling your insurance company.
The amount you can borrow also depends on any existing loans against the policy. If you have already borrowed $3,000 against a $10,000 cash value, your available borrowing room shrinks. Interest on the first loan accrues, which further reduces what you can borrow next time.
Interest rates and repayment terms vary by policy and insurer
The interest rate on a policy loan is set by your insurance company and is written into your policy contract. Rates typically range from 5 to 8 percent, though this varies. Some policies have a fixed rate; others have a variable rate that can change. Check your policy documents or call your insurer to find out what rate applies to your loan.
You are not required to make regular monthly payments on a policy loan the way you would with a bank loan. Instead, interest accrues and is added to your loan balance. You can repay the loan whenever you want — in full, in part, or not at all during your lifetime. If you do not repay it, the balance straightforward grows as interest compounds.
If you die before repaying the loan, the unpaid balance is subtracted from the death benefit. If the loan balance is $15,000 and the death benefit is $100,000, your beneficiaries receive $85,000. If the loan balance grows larger than the death benefit itself, the policy may lapse and provide no payout at all.
What happens if you do not repay the loan
If you never repay a policy loan, the interest keeps accruing. Over time, the loan balance can grow substantially. The insurance company does not pursue you for payment the way a bank would — they straightforward deduct the balance from your death benefit when you die.
The real risk is policy lapse. If the loan balance plus accrued interest grows large enough that it exceeds the cash value, the policy can terminate. Once a policy lapses, you lose all life insurance coverage and cannot get it back without reapplying and passing underwriting again. At that point, your age and health may make the premiums much higher or the policy unavailable altogether.
Some insurers send notices when a loan balance is approaching the point of lapse, giving you time to repay or add funds. Others do not. Check your policy documents to see what your insurer's lapse rules are, or call them directly to ask.
Policy loans versus surrendering the policy for cash
If you need cash, you have two main options: take out a loan against the cash value, or surrender the policy and take the cash value as a lump sum. A policy loan lets you keep the death benefit in place (minus the loan balance). Surrendering the policy gives you all the cash value but ends your coverage.
With a loan, you keep paying premiums to maintain the policy, and you owe interest on the borrowed amount. With a surrender, you get the cash when ready and stop paying premiums, but your beneficiaries receive nothing when you die. A loan makes sense if you want to keep your coverage; a surrender makes sense if you no longer need the insurance.
Surrendering a policy can also trigger a tax bill. If the cash value exceeds what you have paid in premiums over the life of the policy, the excess is taxable income. A policy loan does not create a tax event unless the policy lapses while a loan is outstanding.
Tax treatment of policy loans
A policy loan itself is not taxable income. You are borrowing your own money, so the IRS does not treat it as income in the year you take it out. You do not receive a 1099 form, and you do not report the loan on your tax return.
However, if your policy lapses while you have an outstanding loan, the situation changes. When a policy terminates, any loan balance that exceeds the premiums you paid into the policy becomes taxable income. This can create an unexpected tax bill in the year the policy lapses.
Interest you pay on a policy loan is also not tax-deductible. Unlike mortgage interest or student loan interest, you cannot write off policy loan interest on your tax return. This is another reason to understand the true cost of borrowing before you take out a loan.
Alternatives to policy loans
If you need cash and have a permanent life insurance policy, a policy loan is one option, but not the only one. A personal loan from a bank or credit union may have a lower interest rate, especially if you have good credit. A home equity line of credit (HELOC) or home equity loan typically offers lower rates than a policy loan because your home secures the debt.
A credit card cash advance is faster but usually carries a much higher interest rate. A 401(k) loan (if your employer plan allows it) lets you borrow from your retirement savings, though you risk losing growth on that money and may owe taxes if you leave your job before repaying.
Before taking a policy loan, compare the interest rate and terms to what you could get elsewhere. A policy loan makes the most sense when you need money quickly, have poor credit, or want to avoid a credit check. If you have other borrowing options available at a lower rate, those may be worth exploring first.
Frequently Asked Questions
Can I borrow against my 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. If you need cash and have a term policy, you would need to explore other borrowing options.
What happens to my death benefit if I take out a policy loan?
The death benefit is reduced by the unpaid loan balance plus any accrued interest. If you borrow $20,000 and the loan balance grows to $25,000 by the time you die, your beneficiaries receive $25,000 less than the original death benefit. If the loan balance exceeds the death benefit, the policy may lapse and pay nothing.
Do I have to repay a policy loan before I die?
No. You can repay the loan whenever you want, or not at all. If you do not repay it, the balance is straightforward deducted from your death benefit. However, if the balance grows large enough to exceed your cash value, the policy can lapse and terminate, leaving no death benefit for your beneficiaries.
Will taking a policy loan affect my credit score?
No. A policy loan does not appear on your credit report because it is not a credit transaction. The insurance company does not report it to credit bureaus, and it does not affect your credit score or credit history. This is one advantage of a policy loan over a bank loan or credit card.
Can I borrow against a policy I own but someone else is insured under?
Generally, no. You can only borrow against a policy if you own it. If someone else owns the policy and you are the insured person, you cannot take out a loan against it. The policy owner has the right to borrow; the insured person does not. Check your policy documents to confirm who the owner is.