Yes, you can borrow from a life insurance policy, but only certain types let you do it
You can borrow money from a permanent life insurance policy — whole life, universal life, or variable universal life — because these policies build cash value over time. Term life insurance has no cash value, so you cannot borrow from it. The loan comes from the insurance company, and you repay it with interest. If you die before repaying, the insurance company deducts what you owe from the death benefit your beneficiaries receive.
A policy loan is different from surrendering the policy. When you take a loan, the policy stays in force and continues to build cash value. When you surrender it, you end the coverage permanently and receive whatever cash value remains after fees.
Key Takeaways
- Only permanent life insurance policies (whole life, universal life, variable universal life) have cash value you can borrow against; term life policies do not.
- Policy loans typically charge interest rates between 5 and 8 percent, though the exact rate depends on your policy and when it was issued.
- The amount you can borrow is usually up to 90 percent of your policy's cash surrender value, but some policies allow less.
- Unpaid loan balances reduce the death benefit your beneficiaries receive dollar-for-dollar, and interest continues to accrue even after you die.
- You do not have to repay a policy loan on a set schedule, but unpaid interest compounds and can eventually reduce your death benefit to zero.
How much you can borrow and what it costs
The amount available to borrow depends on your policy's cash surrender value — the amount the insurance company would pay you if you cancelled the policy today. Most policies let you borrow up to 90 percent of that value, though some allow only 75 or 80 percent. Your policy document states the exact percentage.
Interest rates on policy loans vary. Older policies often have fixed rates written into the contract, sometimes as low as 4 or 5 percent. Newer policies typically use a variable rate tied to a market index, which can range from 5 to 8 percent or higher depending on current conditions. Your insurance company will tell you the current rate when you request a loan.
You pay interest on the loan balance, not on the full cash value. If you borrow $10,000 at 6 percent interest, you owe $600 in interest the first year. Interest compounds annually, meaning unpaid interest gets added to the loan balance and earns interest itself in the following year.
How the loan affects your death benefit
When you die, the insurance company subtracts any unpaid loan balance and accrued interest from the death benefit before paying your beneficiaries. If your policy has a $500,000 death benefit and you have an unpaid loan of $50,000 plus $5,000 in interest, your beneficiaries receive $445,000.
This matters most if you take a large loan and do not repay it. Over time, unpaid interest can grow significantly. If the loan balance and interest eventually equal or exceed the cash value, the policy can lapse — meaning your coverage ends and you lose the death benefit entirely. The insurance company will typically send you a notice before this happens, giving you time to repay or add money to the policy.
Repayment terms and what happens if you do not repay
Unlike a traditional loan from a bank, a policy loan has no fixed repayment schedule. You can repay it whenever you want, in whatever amounts you want. Some people repay it over a few years; others never repay it at all and let the balance be deducted from the death benefit.
If you do not repay, interest keeps accruing. The loan balance grows each year, and the death benefit shrinks by the same amount. If you eventually want to surrender the policy, the insurance company deducts the unpaid loan and interest from the cash value you receive.
If the loan balance and accrued interest grow to equal the cash value, the policy lapses automatically. At that point, you lose all coverage and your beneficiaries receive nothing. The insurance company typically sends notices before this happens, but it is your responsibility to monitor the loan balance.
How to request a policy loan
Contact your insurance company directly — call the customer service number on your policy statement or visit their website. You will need your policy number. The company will tell you how much cash value you have, how much you can borrow, and what the current interest rate is.
The process process is usually straightforward and faster than a bank loan. Many companies process requests within a few days to a week. You will sign a loan agreement that states the amount, interest rate, and terms. The company then sends you a check or deposits the money directly into your bank account.
Some policies allow you to set up an automatic loan repayment plan, where a portion of any policy dividends (if your policy pays them) goes toward repaying the loan. Ask your insurance company whether this option is available on your policy.
Policy loans versus other borrowing options
A policy loan is often cheaper than a credit card or personal loan, especially if your policy has a fixed interest rate locked in years ago. However, it is more expensive than a home equity line of credit if you own a home. The trade-off is that a policy loan requires no credit check and no income verification — the insurance company only cares that you have enough cash value to borrow against.
If you surrender the policy instead of taking a loan, you receive the full cash value when ready with no interest charges. However, you lose all life insurance coverage. If you still need the insurance, a loan is the better choice because the policy stays active.
Surrendering a policy can also trigger tax consequences. If your cash value exceeds what you paid in premiums, you may owe income tax on the difference. A policy loan does not create a taxable event unless the loan balance exceeds your total premiums paid, which is rare.
Tax treatment of policy loans
Policy loans are generally not taxable income. You are borrowing against your own money (the cash value), not receiving income from the insurance company. However, there is an exception: if the loan balance exceeds the total amount of premiums you have paid into the policy, the excess may be taxable as ordinary income.
For example, if you paid $50,000 in premiums and your cash value grew to $80,000, you can borrow up to $72,000 (90 percent of $80,000) without tax consequences. If you borrow more than $50,000, the amount above $50,000 may be taxable. Your insurance company can tell you your total premiums paid.
If the policy lapses while you have an unpaid loan, the forgiven loan balance may become taxable. Consult a tax professional if you are considering a large loan or if your policy has been in force for many years.
Frequently Asked Questions
Can I borrow from a term life insurance policy?
No. Term life policies have no cash value, so there is nothing to borrow against. Only permanent policies — whole life, universal life, and variable universal life — build cash value and allow loans.
What happens if I die with an unpaid policy loan?
The insurance company deducts the unpaid loan balance and all accrued interest from the death benefit before paying your beneficiaries. If you borrowed $30,000 and owe $5,000 in interest, your beneficiaries receive $35,000 less than the stated death benefit.
Can I borrow more than once from the same policy?
Yes. You can take multiple loans as long as the total does not exceed your borrowing limit (usually 90 percent of cash value). Some people take a second loan while still repaying the first. Interest accrues on each loan separately.
Do I need the insurance company's permission to take a policy loan?
You do not need permission, but you do need to request the loan formally. The insurance company will verify you have enough cash value and will process your request. They cannot deny a policy loan if you meet the basic requirement of having sufficient cash value.
What if my policy loan interest rate is very high?
If you have an older policy with a variable rate that has climbed above 8 percent, you can explore refinancing by taking a new loan from a different insurance company against a different policy. However, this is complex and may trigger tax issues. Speak with a financial professional before attempting this.