You can borrow against a life insurance policy by contacting your insurer and requesting a policy loan, using your accumulated cash value as collateral. There’s no credit check, no formal application process, and no fixed repayment schedule. The catch: only permanent life insurance policies build cash value, so if you have term life insurance, this option isn’t available to you.
Which Policies Allow Loans
Only permanent life insurance policies accumulate cash value, which is the pool of money you’re borrowing against. Three types qualify:
- Whole life insurance: Provides coverage for your entire life with a guaranteed cash value that grows at a fixed rate. This is the most straightforward type for policy loans because the growth is predictable.
- Universal life insurance: Sometimes called flexible premium adjustable life insurance, this type lets you adjust your premiums and death benefit over time. Cash value grows based on a credited interest rate.
- Variable life insurance: Cash value is tied to investment accounts you choose, so it fluctuates with the market. You can still borrow against it, but the available amount changes with your investment performance.
Term life insurance, which covers you for a set number of years (10, 20, or 30), has no cash value component and doesn’t allow loans. If your only coverage is term life, you’d need to look at other borrowing options entirely.
Most policies need several years before the cash value is large enough to borrow against. You generally can’t take out a loan in the first year or two. The exact timeline depends on your premium amount and the policy’s growth rate, but many policyholders wait five to ten years before the cash value becomes meaningfully useful as a borrowing source.
How to Request a Policy Loan
The process is simpler than almost any other type of borrowing. You contact your insurance company, either by phone, through their website, or through your agent, and request a loan against your cash value. There’s no credit check, no income verification, and no underwriting process. You’re essentially borrowing your own money, with the policy itself serving as collateral.
Most insurers let you borrow up to 90% of your policy’s cash value, though the exact percentage varies by company and policy type. If your policy has $50,000 in cash value, you could typically access up to $45,000. Funds usually arrive within a few business days, and some companies offer direct deposit.
Interest Rates and How They Work
Policy loans charge interest, and that interest accrues whether or not you make payments. Rates are typically lower than personal loans and significantly lower than credit cards. Many whole life policies have a fixed loan rate written into the contract, often in the range of 5% to 8%. Universal and variable life policies may charge variable rates.
Here’s the detail that trips people up: unpaid interest gets added to your loan balance. If you borrow $10,000 at 6% and make no payments for a year, you now owe $10,600. The following year, interest accrues on that larger amount. This compounding effect means a small loan can grow substantially if you ignore it for years.
Repayment Is Flexible, but Not Optional in Practice
Unlike a mortgage or car loan, a policy loan has no fixed repayment schedule. You can pay a large lump sum one month and nothing the next. There are no late fees or penalties for skipping payments. This flexibility is one of the biggest advantages of borrowing against life insurance.
That said, “repayment isn’t required” doesn’t mean you can safely forget about the loan. Two things happen when you don’t pay it back:
First, your death benefit shrinks. If you die with a $200,000 policy and an outstanding loan balance of $30,000 (including accrued interest), your beneficiaries receive $170,000. Every dollar you owe comes directly out of what your family would get.
Second, and more urgently, if the loan balance plus accrued interest grows to equal your policy’s cash value, the policy lapses. Your coverage gets canceled. You lose the death benefit entirely. As long as you keep paying your regular premiums and enough cash value remains to cover the loan interest, the policy stays in force. But letting a loan grow unchecked is the fastest way to lose your coverage.
Tax Rules You Need to Know
The money you receive from a policy loan is not taxable income, as long as your policy remains active. This is a major advantage over withdrawing from a retirement account or cashing out investments, where you’d owe taxes on gains.
The tax situation changes if your policy lapses or you surrender it while a loan is outstanding. At that point, the IRS treats any gain as taxable income. The gain is calculated as the amount you received from the policy’s cash value minus the total premiums you paid in. So if you paid $40,000 in premiums over the years and the cash value grew to $60,000 before the policy lapsed, you could owe income tax on that $20,000 difference.
This is why letting a policy lapse with an outstanding loan can create an unpleasant surprise: you lose your coverage and get a tax bill in the same year.
When a Policy Loan Makes Sense
Borrowing against life insurance works best for short-to-medium-term cash needs when you have a clear plan to repay. Common uses include covering an emergency expense, bridging a gap between jobs, funding a down payment, or paying off higher-interest debt. The combination of no credit check, low interest rates, and flexible repayment makes it genuinely useful in the right situation.
It makes less sense if you’re already struggling to pay your premiums, if the loan would consume most of your cash value, or if you have no realistic plan to pay it back. In those cases, the risk of your policy lapsing, losing your death benefit, and triggering a tax event outweighs the convenience of easy access to cash. Before you borrow, check your current cash value, understand the interest rate your policy charges, and think through how the loan balance will affect your beneficiaries if something happens to you before it’s repaid.