Borrowing from Life Insurance Policies: What You Need to Know

Can You Borrow From Any Life Insurance Policy?

No, only policies that accumulate cash value—primarily whole life, universal life, and certain indexed universal life—offer a loan feature. Term life and many variable policies do not hold cash value, so they cannot be borrowed against.

How Policy Loans Work

When you take a loan, you receive cash equal to a portion of the policy's cash value. The loan must be repaid with interest, which the insurer sets (often 5–8% per year). If you do not repay, the loan balance, plus interest, is deducted from the death benefit or cash surrender value.

Interest and Repayment Flexibility

Interest is typically charged on the outstanding loan balance and accrues daily. You can repay the loan anytime, and you may choose to pay only interest to keep the principal unchanged. If you leave the loan unpaid, the insurer may automatically add interest to the principal, increasing the amount owed.

Impact on Policy Performance

Borrowing reduces the available cash value, which can lower dividend payouts and affect the growth rate in variable or indexed policies. A large loan may also trigger policy surrender if the remaining cash value cannot cover the loan and interest.

When Borrowing Makes Sense

Borrowing can be useful for short‑term liquidity needs, such as covering emergency expenses or bridging cash flow while waiting for a loan to be approved. Because the loan is tax‑deferred, it can be a cost‑effective alternative to a traditional loan if the policy's growth potential outweighs the loan interest.

Key Considerations Before Borrowing

• Loan Limits: Most insurers allow loans up to 80–90% of cash value, but the exact cap depends on the policy and company. • Interest Rates: Fixed versus variable rates differ by insurer and policy type. • Tax Implications: Loans are generally non‑taxable until the policy lapses or is surrendered. • Effect on Death Benefit: Outstanding loans reduce the benefit paid to beneficiaries. • Policy Lapse Risk: Failure to keep the loan interest paid can cause the policy to lapse, eliminating coverage entirely.

Alternatives to Policy Loans

Consider a qualified dividend withdrawal (if available), a policy dividend payout, or a traditional bank loan if the cash value is low or the policy is at risk of lapse. Each option has its own costs and benefits, so compare the total cost of borrowing versus the loan's interest and potential loss of coverage.

Final Thoughts

Borrowing from a life insurance policy is only an option with policies that build cash value. Understanding the loan terms, interest, and how the loan affects your policy's long‑term performance is essential before proceeding.