How to Borrow From a Life Insurance Policy: A Step‑by‑Step Guide

What Is a Policy Loan?

A policy loan lets you tap the cash value built into a permanent life insurance contract—such as whole life or universal life—without surrendering the policy. The loan is secured by the policy's cash value and is typically interest‑only, meaning you can keep the death benefit intact if you repay on time.

When Is Borrowing a Good Idea?

Borrowing can be useful for:

• Short‑term liquidity needs (home repairs, medical expenses)

It is less suitable for:

• Long‑term debt replacement—interest can erode cash value over time.

How to Request a Loan

Step 1: Verify Policy Type

Only permanent policies have cash value. Term life policies do not.

Step 2: Contact Your Insurer

Call the customer service number on your policy statement or log into your online account. Ask for a "policy loan application."

Step 3: Provide Required Information

Typical documents:

• Policy number and current cash value statement

Some insurers allow online submission; others require a signed form.

Step 4: Review Loan Terms

Key terms to check:

• Interest rate (often variable, tied to a benchmark like the prime rate)

Loan amount is usually capped at 90–95% of cash value minus any existing loans.

Step 5: Receive Funds

Funds are typically deposited within 3–5 business days. Some insurers offer a check, others a direct transfer.

Interest and Repayment

Interest accrues daily and is added to the loan balance if not paid. If you do not repay, the accumulated interest can reduce the death benefit.

Impact on Death Benefit and Cash Value

Outstanding loans and accrued interest are deducted from the death benefit at death. If the loan balance exceeds cash value, the policy may lapse, leaving no benefit.

Key Risks and Mitigations

Risk 1: Reduced Payout

Mitigation: Reimburse the loan promptly or set up a repayment schedule.

Risk 2: Tax Consequences

Loans are generally tax‑free if the policy remains in force. However, if the policy lapses, the loan may be treated as a taxable distribution.

Comparing Policy Loans to Other Loans

Practical Tips for Borrowing Wisely

• Use the loan for high‑interest debt or emergency needs.

• Set up automatic monthly payments to keep the balance low.

• Keep an eye on policy performance—if cash value grows slowly, consider alternative financing.

When to Avoid Borrowing

Borrowing is ill‑advised if you:

• Need large sums that will outpace cash value growth.

In such cases, a personal loan or line of credit may be more cost‑effective.

Final Takeaway

Borrowing from a life insurance policy can be a flexible, low‑interest option if you understand the mechanics and stay disciplined with repayment. Always review your policy's specific terms and consult a financial advisor before proceeding.