Yes, you can borrow from a permanent life insurance policy, but only certain types let you do it
If you own a whole life or universal life policy, you can borrow against the cash value that has built up inside it. 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 — the company does not take the money from your death benefit unless you die before repaying it.
A policy loan is different from surrendering your policy (cashing it out entirely). When you borrow, the policy stays in force and your beneficiary still receives a death benefit when you die — but the amount they get is reduced by whatever you still owe on the loan.
The main appeal of a policy loan is speed and simplicity. You do not have to prove income or pass a credit check. The interest rate is set in your policy document and does not change based on market conditions or your credit score. You can usually get the money within days.
Key Takeaways
- Only whole life and universal life policies have cash value you can borrow against; term life policies do not.
- A policy loan does not require a credit check or income verification, and the interest rate is locked into your policy.
- Any amount you borrow reduces your death benefit dollar-for-dollar unless you repay the loan before you die.
- If you do not repay the loan and interest, the insurance company will deduct what you owe from the death benefit your beneficiary receives.
- Borrowing against your policy can trigger a tax bill if the loan plus previous withdrawals exceed what you paid in premiums.
How much you can borrow and what it costs
The amount you can borrow is typically 50 to 90 percent of your cash value, depending on your policy. You cannot borrow the full cash value. The insurance company keeps a cushion to protect itself in case the loan balance grows faster than you repay it.
Interest rates on policy loans vary by insurer and by policy type. Whole life policies often charge 5 to 8 percent annually. Universal life policies may charge a fixed rate or a variable rate that moves with market conditions — check your policy document for the exact terms. You pay interest on the loan balance, and if you do not make payments, the unpaid interest gets added to what you owe.
The loan does not have a fixed repayment schedule. You can repay it whenever you want, in whatever amounts you want. Some people repay it over a few years; others repay it slowly over decades. If you never repay it, the balance straightforward grows with interest until you die, at which point the insurance company deducts the full amount (loan plus accumulated interest) from your death benefit.
What happens to your death benefit when you borrow
Your death benefit is reduced by the loan balance at the moment you die. If your policy has a $500,000 death benefit and you have borrowed $100,000 that you have not repaid, your beneficiary receives $400,000. If you have also accumulated $15,000 in unpaid interest on that loan, your beneficiary receives $385,000.
This matters most if you borrowed the money for a short-term need and planned to repay it. If you die before repaying, your beneficiary bears the cost. If you borrowed for a permanent reason — to cover ongoing expenses or supplement retirement income — you may have already factored this into your plan, and the reduced benefit is expected.
The policy itself stays active as long as you keep paying premiums. Borrowing does not cancel your coverage. However, if the loan balance plus accumulated interest ever exceeds your cash value, the policy can lapse (end) unless you repay part of the loan or add money to the policy.
Tax consequences of borrowing from your policy
A policy loan itself is not taxable income. You borrowed money, so the IRS does not count it as earnings. However, if the total amount you have borrowed and withdrawn from the policy exceeds the total premiums you paid into it, the excess is taxable as ordinary income.
Example: You paid $80,000 in premiums over 20 years. Your cash value is now $150,000. You borrow $60,000. You have now taken out $60,000 against premiums of $80,000, so no tax is owed yet. But if you later borrow another $25,000, you have now taken out $85,000 against $80,000 in premiums. That $5,000 excess is taxable income in the year you borrow it.
If your policy is a Modified Endowment Contract (MEC) — a type of policy that was funded too quickly — the tax rules are stricter. Loans from an MEC are taxed differently and may trigger a 10 percent penalty if you are under age 59½. Ask your insurance agent whether your policy is an MEC before you borrow.
When a policy loan makes sense and when it does not
A policy loan works well if you need money quickly and have no other source, or if you want to avoid selling investments at a bad time. Because there is no credit check, it can be useful if your credit score is low or you are between jobs. The interest rate is usually lower than a personal loan or credit card, and you control the repayment schedule entirely.
A policy loan is less useful if you are borrowing to cover an ongoing expense you cannot afford. If you need the money because your income has dropped permanently, borrowing from your policy just delays the problem — you will still owe the money back, and now you are paying interest on top of it. In that situation, it might be better to surrender the policy and use the cash value, or to explore other options.
Borrowing also reduces the protection your beneficiary receives. If your policy is meant to replace your income for your family, borrowing against it defeats that purpose. Before you borrow, ask yourself whether your beneficiary would be harmed if you died before repaying the loan.
How to request a policy loan
Contact your insurance company directly — call the number on your policy statement or visit their website. You will need your policy number. The company will tell you how much you can borrow based on your current cash value.
You will fill out a loan request form. The company does not require a credit check or income verification. They will ask you to choose how you want the money — direct deposit to your bank account is typical, though some companies offer a check.
The money usually arrives within 3 to 10 business days. Some companies offer faster processing if you request it, though there may be a fee. Once the loan is in place, you can repay it by sending a check to the insurance company, setting up automatic payments, or making payments online through their website.
Alternatives to borrowing from your policy
If you own a whole life or universal life policy but borrowing does not feel right, you can surrender the policy and receive the cash value in full. This ends your coverage, so your beneficiary receives nothing when you die. You may owe income tax on the amount that exceeds your premiums paid. Use this option only if you no longer need the death benefit.
You can also withdraw money from your cash value without taking out a loan. A withdrawal is permanent — you do not repay it — but it reduces your death benefit and your cash value. Withdrawals are taxed the same way as loans: the amount above your premiums paid is taxable income. Withdrawals also reduce your policy's growth potential going forward.
If you need money and have other assets, a personal loan or home equity line of credit may be cheaper than borrowing from your policy, especially if your policy's interest rate is high. Compare the interest rate on a policy loan to what you could get elsewhere before you decide.
Frequently Asked Questions
Can I borrow from a term life policy?
No. Term life policies have no cash value, so there is nothing to borrow against. Only whole life and universal life policies build cash value. If you own a term policy and need money, your only option is to surrender it and receive nothing, since term policies have no cash component.
What happens if I die before I repay the loan?
Your beneficiary still receives a death benefit, but it is reduced by the loan balance plus any unpaid interest. If your policy has a $300,000 death benefit and you owe $50,000 on a loan, your beneficiary receives $250,000. The insurance company deducts what you owe before paying out.
Can the insurance company refuse to give me a loan?
The insurance company cannot refuse a policy loan if your cash value is high enough. However, they can limit how much you can borrow — usually 50 to 90 percent of cash value. If your cash value is very low or zero, you cannot borrow anything.
Do I have to repay a policy loan?
You are not legally required to repay it, but if you do not, the balance grows with interest and is deducted from your death benefit when you die. If the loan balance plus interest exceeds your cash value, your policy can lapse and end, leaving your beneficiary with nothing.
Will borrowing from my policy affect my credit score?
No. A policy loan does not appear on your credit report because it is not a 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 in any way.