Borrowing from the Cash Value of a Life Insurance Policy

How Borrowing Works in a Cash‑Value Policy

A permanent life insurance policy—whole or universal—accumulates cash value that policyholders can borrow against. The policy's face value is the death benefit; the cash value is the policy's savings component. A borrower takes a loan against the cash value, not the face value.

Eligibility and Loan Limits

To qualify, the policy must have a positive cash value. The maximum loan amount is typically the cash value minus any existing loans, but insurers often cap it at 90 % of the cash value to preserve sufficient collateral.

Interest, Repayment, and Tax Implications

Interest rates are set by the insurer, usually ranging from 4 % to 7 %. The loan is a debt; if unpaid, it reduces the death benefit and may lead to policy surrender. Interest is not tax‑deductible, but unpaid loans are not taxed as income until the policy lapses or is surrendered.

Impact on Policy Performance

Borrowing reduces the cash value and death benefit, potentially affecting the policy's ability to stay in force if premiums are not paid. A large loan can also trigger a policy's surrender feature if the loan balance exceeds the cash value.

When Borrowing Makes Sense

• Short‑term liquidity needs without selling the policy.
• Low‑interest financing for a large purchase.
• Avoiding a taxable distribution.