Here's something most people don't realize about their permanent life insurance policy: it's not just protection for your family—it's also a source of cash you can tap into while you're alive. If you have whole life, universal life, or indexed universal life insurance, you've been building something called cash value. And you can borrow against it, no questions asked.
Need to cover an emergency expense? Want to take advantage of an investment opportunity? A life insurance policy loan gives you access to your money without the hassle of bank applications or credit checks. But before you tap that cash value, you need to understand exactly how these loans work—and what they could mean for your death benefit down the road.
What Is a Life Insurance Policy Loan?
A life insurance policy loan is money you borrow from your insurance company using your policy's cash value as collateral. Think of it like a secured loan where you're borrowing against your own savings. You're not actually withdrawing your cash value—you're borrowing against it. The insurance company holds your cash value as security, and you get access to funds.
Only permanent life insurance policies build cash value. Term life insurance doesn't have this feature, so you can't borrow against it. With whole life or universal life policies, a portion of your premiums goes toward building cash value over time. After a few years (typically 3-10, depending on your policy), you've accumulated enough to start borrowing.
Most insurance companies let you borrow between 75% and 90% of your available cash value. So if your policy has $50,000 in cash value and your insurer allows 90% loans, you could borrow up to $45,000. The best part? No credit check, no lengthy application, and often you can get the money within days.
How Policy Loans Actually Work
When you take a policy loan, your insurance company doesn't hand you your cash value. Instead, they give you a loan and keep your cash value as collateral. Your cash value continues to grow (or earn interest) as if you hadn't borrowed anything. That's different from a withdrawal, which would reduce your cash value directly.
You'll pay interest on the loan, typically between 4% and 8% annually as of 2024. Some policies have fixed rates, others have variable rates that adjust periodically. The interest compounds—meaning if you don't pay it, you'll owe interest on the interest. But here's the thing: you're never required to pay back a policy loan during your lifetime. There's no payment schedule, no monthly bills, no pressure.
You can repay the loan whenever you want—in full, in part, or not at all. Some people make regular payments to keep their policy strong. Others let the loan ride and accept that their death benefit will be reduced. It's completely up to you and your financial situation.
The loan is also tax-free, which is a major advantage. Unlike withdrawing from a retirement account or taking out a taxable personal loan, policy loans don't create taxable income—as long as your policy stays in force. This makes them attractive for people who need cash but want to avoid tax consequences.
The Impact on Your Death Benefit
Here's where policy loans get serious. If you pass away with an outstanding loan, the insurance company deducts the loan balance plus any accrued interest from your death benefit before paying your beneficiaries. Say you have a $250,000 policy and you borrowed $40,000 five years ago. If you haven't repaid it and interest has added another $15,000 to the balance, your beneficiaries would receive $195,000 instead of the full $250,000.
That might be perfectly fine if you used the loan for something worthwhile and your family still gets substantial support. But if the loan keeps growing, it can eat into your death benefit significantly. In 2023, life insurance surrender payments—which include situations where policies lapse or are cashed out—totaled $41.6 billion, up 39% from the previous year. Many of those were policies that became unsustainable due to loans or other factors.
The bigger risk is policy lapse. If your loan balance plus interest grows larger than your cash value, your policy could collapse. You'd lose your coverage entirely, and you could face a surprise tax bill on the amount you borrowed. This happens when people take large loans and ignore the compounding interest for years. To avoid this, either make periodic interest payments or keep an eye on your loan balance to ensure it doesn't spiral out of control.
When Policy Loans Make Sense (and When They Don't)
Policy loans work well for short-term needs or emergencies. Maybe you need to cover an unexpected medical bill, bridge a gap between jobs, or seize a time-sensitive investment opportunity. Since there's no approval process and the money comes quickly, policy loans are a convenient option when you need cash fast.
They're also useful if you have poor credit or can't qualify for traditional loans. Because you're borrowing against your own money, your credit score is irrelevant. And unlike home equity loans or lines of credit, there's no risk of foreclosure or repossession if you don't pay back the loan.
But policy loans aren't the right choice for everyone. If you're borrowing for something frivolous or you have no plan to repay the loan, you're putting your coverage and your family's financial security at risk. The interest compounds silently, and before you know it, you could owe more than you borrowed. If you need a large sum for a long time and have other borrowing options with lower rates, those might be smarter choices.
Also consider this: your life insurance was designed to protect your loved ones. Every dollar you borrow reduces that protection. If maintaining a full death benefit is critical for your family's future, borrowing against it might not align with your goals.
How to Take Out a Policy Loan
Taking a policy loan is straightforward. Contact your insurance company directly—most have online portals, phone numbers, or mobile apps where you can request a loan. You'll need to specify how much you want to borrow (up to your available limit) and provide instructions for how you want to receive the funds.
Before you borrow, ask your insurer a few key questions: What's the current interest rate? Is it fixed or variable? How much cash value do I have available? What's the maximum I can borrow? What happens if I don't repay the loan? Understanding these details up front helps you make an informed decision.
Once approved (which is usually automatic if you have sufficient cash value), you'll typically receive the money within a few business days via check or direct deposit. From there, you're free to use it however you need. Just remember to monitor your loan balance and consider making at least interest payments to keep your policy healthy.
Life insurance policy loans offer flexibility and convenience that's hard to beat. But like any financial tool, they require thoughtful use. Borrow responsibly, understand the impact on your death benefit, and keep your long-term goals in mind. If you're considering a policy loan, talk to your insurance agent or a financial advisor to make sure it fits your overall financial plan. Your life insurance is there to protect the people you love—make sure your decisions today support that mission tomorrow.
