Yes, you can borrow from a permanent life insurance policy, but only certain types let you do it
If you own 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 a cash value, so you cannot borrow from it. The money you borrow comes from your own cash value, not from the insurance company's pocket, which is why the process is faster than a traditional loan and does not require a credit check.
The loan is not free. You pay interest on what you borrow, and the interest rate varies by insurer and policy type — it may be fixed or tied to a rate the company sets each year. If you die before repaying the loan, the unpaid balance plus interest is subtracted from the death benefit your beneficiaries receive. If the loan grows large enough, it can eventually reduce your death benefit to zero or even cause the policy to lapse.
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 typically takes one to two weeks to process, much faster than a bank loan.
- You pay interest on the borrowed amount, and any unpaid balance is deducted from your death benefit when you die.
- If the loan balance grows too large, your policy can lapse and lose its death benefit protection entirely.
- You can repay the loan on your own schedule, but unpaid interest compounds and can eventually exceed your cash value.
How the borrowing process works
To borrow from your policy, you contact your insurance company and request a policy loan. You will need your policy number and basic information about how much you want to borrow. The company will tell you the current cash value of your policy, the maximum you can borrow (usually 75 to 90 percent of the cash value), and the interest rate that will explore.
The underwriting is minimal because the insurance company already knows you — they issued your policy and have your full medical history. There is no process process, no income verification, and no credit check. The company straightforward verifies that your policy is in force and calculates the loan amount and terms. Most loans are approved and funded within one to two weeks.
Once the money is in your account, you own it outright. You are not required to use it for any specific purpose, and there are no restrictions on how you spend it. You can use it for medical bills, home repairs, debt payoff, or anything else.
Interest rates and repayment terms
The interest rate on a policy loan depends on your specific policy and your insurance company. Some policies have a fixed rate set when you bought the policy; others use a variable rate that the company adjusts annually based on market conditions. Rates typically range from 5 to 8 percent, but this varies widely. Check your policy documents or call your insurer to find out what rate applies to you.
You are not required to repay the loan on any set schedule. You can repay it all at once, make regular monthly payments, or pay nothing — the choice is yours. However, unpaid interest accrues and is added to your loan balance each year. If you do not pay the interest, it compounds, meaning you owe interest on the interest. Over time, this can cause your loan balance to grow larger than your original cash value.
If your loan balance ever exceeds your cash value, your policy may lapse automatically. When a policy lapses, you lose all death benefit protection, and the policy cannot be revived. This is one of the biggest risks of borrowing from a life insurance policy.
What happens to your death benefit
When you die, your insurance company subtracts any unpaid loan balance plus accrued interest from your death benefit before paying out to your beneficiaries. If you borrowed $50,000 and still owe $48,000 plus $5,000 in interest when you die, your beneficiaries receive the full death benefit minus $53,000.
If your loan balance is very large, it can reduce your death benefit significantly or even eliminate it entirely. For example, if your death benefit is $200,000 and your loan balance plus interest is $210,000, there is nothing left to pay out to your beneficiaries. This defeats the original purpose of carrying life insurance.
For this reason, borrowing from your policy should be a temporary measure, not a permanent solution. If you need ongoing access to cash, a policy loan may not be the right tool.
Comparing a policy loan to other borrowing options
A policy loan is fastest and requires no credit check, which makes it attractive if you need money quickly or have poor credit. However, it is not always the cheapest option. A personal loan from a bank or credit union might have a lower interest rate, especially if you have good credit. A home equity line of credit or home equity loan is often cheaper than a policy loan if you own your home.
The trade-off is speed and simplicity. A bank loan requires an process, income verification, and a credit check, which can take weeks. A policy loan skips all of that. If you have the time to shop around and may have access to for a better rate elsewhere, that may be worth doing. If you need money in days and have limited options, a policy loan is a practical choice.
| Borrowing Option | Speed | Credit Check Required | Typical Interest Rate | Risk to Other Assets |
|---|---|---|---|---|
| Policy Loan | 1–2 weeks | No | 5–8% | Reduces death benefit; can cause policy to lapse |
| Personal Bank Loan | 2–4 weeks | Yes | 6–12% | None; separate from other assets |
| Home Equity Line of Credit | 2–6 weeks | Yes | 4–8% | Your home is collateral |
| Credit Card | when ready | Yes | 15–25% | None; separate from other assets |
Tax consequences of a policy loan
A policy loan is generally not taxable income. The IRS treats it as a loan against your own money, not as income or a withdrawal. However, this tax-free treatment only applies if your policy remains in force. If your policy lapses while you have an outstanding loan, the unpaid loan balance may become taxable income in that year.
Additionally, if you surrender your policy (cancel it) while you have a loan, any loan balance that exceeds your cost basis in the policy may be taxable. Your cost basis is the total premiums you have paid minus any dividends you received. Consult a tax professional before surrendering a policy with an outstanding loan.
When a policy loan makes sense and when it does not
A policy loan makes sense if you need money quickly, have poor credit or no credit history, and have a specific plan to repay it within a few years. It also makes sense if the interest rate is competitive with what you could get elsewhere and you are confident you will not let the loan balance grow out of control.
A policy loan does not make sense if you are already struggling financially and cannot commit to repaying it. It does not make sense if you are using it to fund ongoing expenses — like living costs or regular bills — because the loan balance will keep growing and eventually threaten your policy. It also does not make sense if you have other borrowing options available at a lower rate and you have time to pursue them.
Before you borrow, ask yourself whether you really need the money or whether you are borrowing out of habit or convenience. A policy loan should be a tool for a specific, temporary need, not a substitute for an emergency fund or a way to live beyond your means.
Frequently Asked Questions
What is the difference between a policy loan and surrendering the policy?
A policy loan lets you borrow against your cash value while keeping your death benefit in place. Surrendering means you cancel the policy and receive the cash value as a lump sum, but you lose all life insurance protection. A loan is reversible; surrender is permanent.
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, variable universal life) build cash value and allow loans.
What happens if I do not repay the policy loan?
You are not forced to repay it, but unpaid interest compounds and adds to your loan balance each year. If the balance grows larger than your cash value, your policy will lapse and you will lose your death benefit. Any unpaid loan balance is also subtracted from what your beneficiaries receive.
Can I borrow more than once from the same policy?
Yes. You can take multiple loans against your cash value as long as the total does not exceed the maximum borrowing limit (usually 75 to 90 percent of cash value). Each loan accrues its own interest.
Does borrowing from my policy affect my credit score?
No. A policy loan does not appear on your credit report because it is not a traditional loan. It does not help or hurt your credit score, and it does not count against your debt-to-income ratio for other loans.