Yes, you can borrow from most permanent life insurance policies, but not from term life
If you have 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. The insurance company lends you your own money at a set interest rate, and you repay it on your own schedule. You do not have to may have access to again or explain what you need the money for.
If you have term life insurance, you cannot borrow. Term policies have no cash value, only a death benefit. They are pure insurance with no savings component.
A policy loan is different from surrendering the policy (cashing it in completely). When you borrow, the policy stays in force and your beneficiary still receives the full death benefit — minus whatever you still owe on the loan — when you die.
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 costs you interest, typically between 5 and 8 percent annually, though your policy documents state the exact rate.
- You repay the loan on your own timeline, but unpaid interest and principal reduce the death benefit your beneficiary receives.
- If you borrow more than the cash value or stop paying interest, the policy can lapse and terminate, leaving you uninsured.
- The loan amount is not taxed as income, but unpaid loans can create tax consequences if the policy lapses.
How much you can borrow and what it costs
The maximum you can borrow is typically 90 percent of your policy's cash value, though some policies allow up to 95 percent. Your insurance company will tell you the exact cash value when you request a loan. This is not the death benefit — it is the amount the company has set aside from your premiums and investment gains.
The interest rate is set in your policy contract and does not change. Most policies charge between 5 and 8 percent per year, though older policies sometimes have lower rates. The interest accrues (builds up) whether you pay it or not. If you do not pay the interest, it gets added to the loan balance, and you owe interest on the interest.
You can repay the loan whenever you want — there is no fixed schedule. You can pay it back in full, make monthly payments, or pay nothing and let it sit. However, any unpaid balance reduces the death benefit. If you borrowed $50,000 and repaid $20,000, your beneficiary would receive the full death benefit minus the remaining $30,000 owed.
The step-by-step process for taking a policy loan
Contact your insurance company directly — call the number on your policy or log into your online account. Ask to speak with someone about a policy loan or find the policy services department. You will need your policy number.
The company will tell you your current cash value and the maximum you can borrow. They will also confirm the interest rate in your specific policy. Ask them to send you the loan agreement in writing before you sign anything.
Once you approve the loan amount, the company typically deposits the money into your bank account within 5 to 10 business days. Some companies offer faster options. You will receive a loan statement showing the amount borrowed, the interest rate, and your repayment options.
You do not need to make regular payments unless your policy requires it — check your contract. However, if the loan balance plus accrued interest ever exceeds your cash value, the policy will lapse (terminate). When that happens, you lose the insurance coverage and may owe taxes on the gain.
When a policy loan makes sense and when it does not
A policy loan can be useful if you need money and want to avoid selling investments, taking a bank loan, or using a credit card. The interest rate is usually lower than credit cards and sometimes lower than personal loans. You are not borrowing from a bank — you are borrowing from your own policy's cash value.
A policy loan makes less sense if your policy's cash value is small. If you have only $5,000 in cash value and borrow $4,500, you have very little room for error. Any market downturn or missed interest payment could cause the policy to lapse.
A policy loan also does not make sense if you are considering surrendering the policy anyway. If you no longer want the insurance, cashing in the policy outright may be simpler than borrowing and then dealing with repayment. You would receive the cash value in one transaction rather than managing a loan balance over time.
What happens if you do not repay the loan
If you never repay the loan, the unpaid balance stays on the books. The interest keeps accruing. The death benefit your beneficiary receives shrinks by the amount owed. If you borrowed $50,000 and never repaid it, and the death benefit is $200,000, your beneficiary gets $150,000.
If the loan balance plus accrued interest grows larger than your cash value, the policy lapses. You lose the insurance coverage. At that point, you may owe income tax on the difference between what you borrowed and what you paid in premiums over the years — this is called a taxable gain. The IRS treats a lapsed policy with an outstanding loan as a taxable event.
If you die while a loan is outstanding, the insurance company pays your beneficiary the death benefit minus the loan balance. There is no penalty for this — it is how the system works. Your beneficiary receives the net amount.
Policy loans versus other ways to access cash from life insurance
A policy loan lets you borrow against cash value and keep the policy in force. You repay on your own schedule. Interest accrues if unpaid.
A policy surrender means you cash in the entire policy and end the insurance coverage. You receive the cash value minus any surrender charges (fees the company deducts). You owe income tax on any gain above what you paid in premiums. Once surrendered, the policy is gone.
A policy withdrawal (available on some universal life and variable universal life policies) lets you withdraw part of the cash value without borrowing. You reduce the cash value but keep the policy in force. Withdrawals are not loans — you do not repay them. However, withdrawals above your cost basis (premiums paid) are taxed as income.
A viatical settlement or life settlement is a sale of the entire policy to a third party. You receive a lump sum (less than the death benefit but usually more than the cash value). The buyer becomes the new owner and beneficiary. This is rare and only makes sense in specific situations, such as a terminal diagnosis.
Questions to ask your insurance company before borrowing
Before you take a policy loan, contact your insurance company and ask for specific information about your policy. Request your current cash value in writing, the maximum loan amount (usually 90 percent of cash value), and the exact interest rate in your contract. Ask how long it takes to receive the money after approval and whether your policy requires minimum interest payments or allows you to skip payments.
Also ask what happens to your policy if the loan balance exceeds the cash value, and whether taking a loan affects your premiums or coverage in any way. Some policies have restrictions or penalties you should know about before borrowing. Getting these answers in writing protects you from surprises later.
Frequently Asked Questions
Will taking a policy loan affect my credit score?
No. A policy loan does not appear on your credit report because it is not a debt to a lender — it is a loan against your own policy. Your credit score is not affected. However, if you default on the loan and the policy lapses, you may face tax consequences.
Can I borrow from my life insurance if I am still paying premiums?
Yes. You can borrow while your policy is active and you are still paying premiums. The loan does not stop your coverage or change your premium payments. However, if you borrow a large amount and do not repay the interest, the policy can eventually lapse even while you are paying premiums.
What if I borrow and then want to cancel my policy?
You can cancel your policy at any time. When you do, the insurance company deducts the outstanding loan balance from the cash value you receive. If the loan balance is larger than the cash value, you owe the difference. You may also owe income tax on any gain.
Is the interest I pay on a policy loan tax-deductible?
No. Interest paid on a policy loan is not deductible on your tax return. Policy loans are treated as personal loans, not business or investment loans. Keep records of what you borrowed and what you repaid for your own tracking.
Can I borrow from a policy I just started?
Not when ready. A new policy has little or no cash value in the first year or two. Cash value builds slowly over time as you pay premiums. Most policies allow borrowing once cash value reaches a certain level, typically after one to three years. Your insurance company can tell you when your specific policy becomes may be able to access.