How to Borrow from a Life Insurance Policy: Steps, Costs, and Risks

Understanding Policy Loans

Borrowing from a life insurance policy means taking a loan against the cash value that has built up in a permanent life insurance contract. The insurer uses the cash value as collateral, so the loan does not require a credit check and does not affect your credit score. The amount you can borrow is typically limited to 90 % of the available cash value, leaving a small buffer to keep the policy in force.

Eligibility and Types of Policies

Only permanent policies—such as whole life, universal life, and variable universal life—accumulate cash value. Term policies do not qualify because they lack a cash‑value component. To be eligible, the policy must be in force for a sufficient period for cash value to grow, usually at least a few years, and the loan amount must not exceed the cash value minus any surrender charges.

How the Loan Process Works

1. Request the loan: Contact your insurer or agent and complete a loan request form. You'll need your policy number and a method for receiving the funds (check, direct deposit, or wire).2. Approval: Since the loan is secured by the cash value, approval is automatic as long as the requested amount is within the allowable limit.3. Disbursement: Funds are typically available within a few business days. The insurer will provide a statement showing the loan balance, interest rate, and any accrued interest.

Interest Rates and Repayment

Policy loans carry interest rates that are usually lower than credit‑card or personal loan rates, but they are not fixed for the life of the loan. Rates may be tied to the insurer's internal rate or a market index and can be adjusted periodically. Interest accrues daily and is added to the outstanding balance if not paid promptly. You can repay the loan at any time, in full or in part, without penalty. Repayment methods include cash, a new premium payment, or a partial surrender of the policy.

Tax Implications

Loans are generally tax‑free because they are considered a borrowing, not a distribution. However, if the loan balance exceeds the policy's cash value and the policy lapses, the outstanding amount may be treated as a taxable distribution. Keeping the loan below the cash‑value threshold helps avoid unexpected tax liability.

Impact on Death Benefit and Policy Health

Any unpaid loan balance, plus accrued interest, is deducted from the death benefit paid to beneficiaries. For example, a $20,000 loan with $2,000 accrued interest will reduce a $250,000 death benefit to $228,000. If the loan grows too large relative to the cash value, the policy could lapse, causing loss of coverage and potential tax consequences.

When Borrowing Makes Sense

Policy loans are useful for emergencies, bridge financing, or covering unexpected expenses when other credit options are costly or unavailable. Because the loan does not require a credit check and the interest may be lower than alternative financing, it can be a strategic tool for those with substantial cash value and a stable policy.

Potential Drawbacks

While convenient, borrowing reduces the cash value that could otherwise be used for future loans or a policy surrender. Persistent borrowing may also erode the policy's growth potential, especially in policies that earn dividends or interest on the cash value. Additionally, if you cannot repay the loan, the reduced death benefit may not meet your estate planning goals.

Comparison of Key Factors