Yes, you can borrow from a permanent life insurance policy, but only certain types allow it
You can borrow money from a whole life, universal life, or variable universal life policy — but not from term life insurance. These permanent policies build a cash value component over time, and that cash value is what you can borrow against. The loan comes from the insurance company, and you repay it with interest. If you don't repay the loan before you die, the insurance company deducts what you owe from the death benefit your beneficiaries receive.
Term life insurance has no cash value, so there is nothing to borrow against. It exists only to pay a death benefit if you die during the term. If you own term life and need to borrow money, you cannot use that policy as collateral.
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.
- A policy loan is borrowed against your own cash value, not given to you as a gift, and you must repay it with interest.
- If you die before repaying the loan, your beneficiaries receive the death benefit minus what you still owe.
- Interest rates on policy loans vary by insurer and policy type, and unpaid interest can compound and reduce your death benefit over time.
- You can borrow up to a certain percentage of your cash value (often 90 percent), but the exact limit depends on your policy and insurer.
How much you can borrow and what it costs
The amount you can borrow is limited to a percentage of your cash value — typically between 75 and 90 percent, depending on your policy and insurance company. If your policy has a cash value of $10,000, you might be able to borrow $7,500 to $9,000. The insurance company sets this limit to protect itself in case the policy lapses or you die before repaying.
Interest rates on policy loans range widely. Some policies have a fixed rate set when you bought the policy (often 5 to 8 percent). Others use a variable rate tied to market conditions or the insurer's cost of borrowing, which can change annually. A few insurers offer a net cost loan, where the interest rate is reduced by the amount of interest your cash value earns — effectively lowering your borrowing cost. You should find your policy documents or contact your insurance company to learn the exact rate on your specific policy.
Interest accrues whether you pay it or not. If you don't make payments, unpaid interest is added to the loan balance, which grows larger over time. This larger balance then earns interest itself. If the loan balance grows too large relative to your cash value, the policy can lapse, meaning your coverage ends and you lose the death benefit.
The process for taking out a policy loan
Contact your insurance company directly — usually through the customer service number on your policy statement or the insurer's website. You will need your policy number. The company will tell you how much cash value you have and how much you can borrow.
The process process is simpler than a bank loan. You typically don't need a credit check, and you don't have to explain what you need the money for. The insurance company is lending you your own money, so underwriting is minimal. Most loans are approved within one to two weeks, though some insurers can process them faster.
Once approved, the money is usually sent to you by check or electronic transfer. You then begin repaying the loan according to a schedule you agree on with the insurer. Some policies allow flexible repayment — you can pay whenever you want, in any amount. Others require a minimum monthly or annual payment.
What happens if you don't repay the loan
If you die before repaying the loan, the insurance company subtracts what you owe from the death benefit. If you borrowed $5,000 at 6 percent interest and never made a payment, and the loan balance grew to $7,200 by the time you died, your beneficiaries would receive the full death benefit minus $7,200. This reduction can be significant if the loan has been outstanding for many years.
If you stop paying but don't die, the unpaid interest keeps compounding. Eventually, the loan balance can grow so large that it exceeds your cash value. When that happens, the policy lapses — your coverage ends and you lose the death benefit entirely. The insurance company will usually send you notices warning that this is about to happen, giving you time to make a payment or surrender the policy on your own terms.
Some policies allow you to surrender the policy and receive the remaining cash value (after the loan is deducted). Others will straightforward lapse, and you receive nothing. Check your policy documents or ask your insurer what happens in your specific situation.
Policy loans versus surrendering your policy
If you need money, you have two main options: borrow against the cash value or surrender the policy and take the cash value as a lump sum. A policy loan lets you keep your death benefit in place — your beneficiaries still receive the full amount (minus what you owe) when you die. Surrendering the policy means you give up the death benefit entirely, but you receive all the cash value at once with no debt to repay.
Surrendering also has tax consequences. If your cash value exceeds what you paid into the policy over the years, the excess is taxable income. A policy loan, by contrast, is not taxable — it is a loan, not income. However, if you never repay the loan and the policy is eventually forgiven or lapses, the forgiven amount may become taxable.
The choice depends on whether you still need the death benefit. If you do, a loan preserves it. If you don't, surrendering may be simpler because you avoid the obligation to repay.
How a policy loan affects your coverage
Taking out a loan does not change your death benefit amount on paper — it remains the same as when you bought the policy. However, the actual amount your beneficiaries receive is reduced by the outstanding loan balance. If your death benefit is $100,000 and you have an unpaid loan of $15,000, your beneficiaries receive $85,000.
A large unpaid loan can also cause your policy to lapse if the loan balance grows larger than your cash value. Once a policy lapses, there is no death benefit at all. This is why it matters to either repay the loan or monitor the balance to make sure it does not spiral out of control.
Some policies allow you to take out a new loan to pay off the old one — essentially refinancing. This can lower your interest rate if rates have dropped, or it can reset the repayment clock. Ask your insurer whether this option is available on your policy.
Frequently Asked Questions
Can I borrow from my life insurance policy without affecting my death benefit?
You can borrow without changing the stated death benefit amount, but the actual payout to your beneficiaries will be reduced by what you owe. If you repay the loan before you die, your beneficiaries receive the full amount. If you don't repay it, they receive the death benefit minus the outstanding loan balance and any accrued interest.
What happens if I borrow from my policy and then stop paying?
Unpaid interest compounds and is added to the loan balance. If the balance grows larger than your cash value, the policy lapses and your coverage ends. You will receive notices before this happens, giving you time to make a payment or take other action.
Is the interest on a policy loan tax-deductible?
No. Policy loan interest is not tax-deductible. However, the loan itself is not taxable income — you are borrowing your own money. If the loan is eventually forgiven or the policy lapses with an unpaid balance, that forgiven amount may be taxable.
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, variable universal life) build cash value and allow loans.
How long does it take to get a policy loan?
Most policy loans are approved within one to two weeks. The process is faster than a bank loan because the insurance company is lending you your own cash value and does not need to run a credit check or verify your income.