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 builds up inside it. Term life insurance does not have this option because it has no cash value to borrow against. The money you borrow comes from your own cash value, not from the insurance company lending you new money.

A policy loan works differently from a regular bank loan. You are not explore for credit or going through an approval process. The insurance company straightforward lets you access the cash value you have already built up, and you pay interest on what you take out. The loan does not affect your credit score because it is not reported to credit bureaus.

The main catch is that any money you borrow reduces the death benefit your beneficiaries will receive — unless you pay the loan back before you die. If you borrow $10,000 and never repay it, your beneficiaries get $10,000 less than the policy promised them.

Key Takeaways

  • Only permanent life insurance policies (whole life, universal life, variable universal life) have cash value you can borrow against; term life insurance does not.
  • A policy loan comes from your own cash value, not new credit, and does not show up on your credit report or require a credit check.
  • Interest rates on policy loans are set by your insurance company and are usually lower than bank loans, but unpaid interest compounds and reduces your death benefit.
  • If you die with an outstanding loan, your beneficiaries receive the death benefit minus whatever you borrowed plus any unpaid interest.
  • You can repay a policy loan on your own schedule, but the longer you wait, the more interest accumulates and the smaller your beneficiaries' payout becomes.

How much you can borrow and what it costs

The amount you can borrow is limited to your policy's current cash surrender value — the amount of money the insurance company would give you if you cancelled the policy today. This is not the same as your death benefit. A policy with a $500,000 death benefit might have only $50,000 in cash value after five years, depending on the type of policy and how long you have owned it.

Most insurance companies let you borrow up to 90 percent of your cash value, though some allow 95 percent or even 100 percent. The remaining amount stays in the policy to keep it active. You can find your current cash value on your annual policy statement, or you can call your insurance company and ask.

The interest rate varies by company and by policy type. Whole life policies often charge a fixed rate set when you bought the policy — sometimes 5 to 8 percent, though this varies. Universal life policies may charge a variable rate that changes with market conditions. Some policies let you choose between a fixed rate and a variable rate. Ask your insurance company what rate applies to your specific policy before you borrow.

Interest starts accruing when ready and compounds annually. If you borrow $10,000 at 6 percent and make no payments, you will owe $10,600 after one year, $11,236 after two years, and so on. The unpaid interest is deducted from your death benefit along with the original loan amount.

The step-by-step process for taking out a policy loan

Contact your insurance company directly — usually through the phone number on your policy or their website. Tell them you want to take out a policy loan and ask how much you can borrow based on your current cash value. They will tell you the interest rate that applies to your policy and answer questions about repayment terms.

Most companies let you borrow by phone or online without paperwork, though some require a written request. The money typically arrives in your bank account within a few business days. A few companies mail a check instead, which takes longer.

Once the loan is in your account, you own it outright. The insurance company does not restrict how you use it. You can pay bills, cover medical expenses, invest it, or use it for any other purpose.

Repayment is flexible. You can pay back the full amount at once, make monthly payments, or pay nothing and let the loan sit. There is no important date. However, any unpaid balance — including interest — reduces your death benefit dollar for dollar. If you die with a $15,000 loan outstanding (including interest), your beneficiaries receive $15,000 less than the policy promised.

What happens if you do not repay the loan

If you never repay a policy loan, the outstanding balance straightforward reduces your death benefit. Your beneficiaries will receive the promised amount minus whatever you borrowed plus all accumulated interest. This is not a penalty — it is how the math works. The insurance company is not chasing you for payment or reporting you to debt collectors.

If the loan balance plus interest grows so large that it exceeds your cash value, the policy can lapse (end). This happens rarely, but it is possible with very large loans or very long periods of non-repayment. If your policy lapses, you lose the death benefit entirely and may face tax consequences on the gains in your cash value. Your insurance company will warn you before this happens and give you a chance to repay or add money to the policy.

If you are struggling to repay a loan, contact your insurance company. Some will let you restructure the repayment or adjust the terms. It is better to talk to them early than to let the loan grow unchecked.

Policy loans versus surrendering your policy

If you need cash, you have two main options: borrow against your cash value or surrender (cancel) the policy and take the cash value as a lump sum. A policy loan is usually better if you want to keep your death benefit in place. Surrendering the policy ends your coverage entirely, and you may owe income taxes on any gains above what you paid in premiums.

A policy loan lets you keep your death benefit while accessing cash. You pay interest, but the interest rate is usually lower than a bank loan or credit card. You also keep the option to repay on your own timeline.

Surrendering is better if you no longer need the death benefit or if the policy is costing you too much in premiums. Once you surrender, you cannot get the policy back, so this is a permanent decision. Talk to your insurance agent or a financial advisor before surrendering a policy.

Tax implications of a policy loan

Policy loans are generally not taxable. The IRS does not treat a loan against your cash value as income, so you will not owe federal income tax on the money you borrow. This is one advantage over surrendering the policy, which can trigger taxes on gains.

However, if your policy lapses while you have an outstanding loan, you may owe taxes on the difference between your cash value and the total premiums you paid. This is rare, but it is worth knowing. Your insurance company will send you a tax form if this happens.

State taxes vary. A few states tax policy loans in specific situations, but most do not. Ask your insurance company or a tax professional if you live in a state with unusual tax rules.

When a policy loan makes sense and when it does not

A policy loan makes sense if you need cash temporarily and want to keep your death benefit in place. Examples include covering a medical emergency, paying off high-interest debt, or bridging a gap between jobs. The interest rate is usually lower than credit cards or personal loans, and you have full control over repayment.

A policy loan does not make sense if you are borrowing to cover ongoing expenses you cannot afford. If you need to borrow repeatedly or if you cannot imagine repaying the loan, the policy is probably costing you more than it is worth. In that case, surrendering the policy and using the cash value for something else might be better.

A policy loan also does not make sense if you are in poor health and expect to die soon. Any unpaid balance reduces what your beneficiaries receive, so borrowing near the end of life can significantly reduce their inheritance. If your health has changed since you bought the policy, talk to your insurance agent about whether keeping the policy still makes sense.

Frequently Asked Questions

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, and variable universal life — build cash value and allow loans.

What if I borrow and then stop paying my premiums?

Your policy can lapse if you stop paying premiums and do not have enough cash value to cover them automatically. If your policy lapses while you have an outstanding loan, the loan balance is deducted from your remaining cash value, and you may owe taxes on the difference. Contact your insurance company when ready if you cannot pay a premium.

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 your borrowing limit. Each loan accrues interest separately, and the combined balance reduces your death benefit.

Do I need to tell my beneficiaries about a policy loan?

You do not have to, but it is a good idea. Your beneficiaries should know that any outstanding loan will reduce their payout. If you plan to repay the loan, let them know your timeline so they understand what to expect.

What happens if I borrow and then want to surrender the policy?

You can surrender a policy with an outstanding loan. The insurance company will deduct the loan balance plus any unpaid interest from your cash value before sending you the remaining amount. You will owe income taxes only on gains above your total premiums paid.