How to Borrow Money from Your Life Insurance | Smart Cash

You can borrow from a permanent life insurance policy that has accumulated cash value, typically up to 90% of that value.

You have a life insurance policy, and you need cash for an unexpected expense or a short-term opportunity. It’s tempting to think you can borrow against it, but that assumption only works for one type of policy — and plenty of people learn this the hard way after calling their insurer.

Borrowing from life insurance is a real option, but it comes with specific rules and potential consequences. This article walks through who qualifies, how the process works, what the costs are, and what happens if you don’t repay the loan.

What a Life Insurance Policy Loan Actually Is

A life insurance policy loan lets you borrow against the cash value that built up within a permanent policy over time. Think of the cash value as a savings account sitting inside your insurance contract — you can access it while keeping the coverage intact.

The catch is that only permanent policies qualify. Whole life, universal life, and variable life policies accumulate cash value as you pay premiums. Term life insurance, which covers you for a set number of years, has no cash value component. A term policy simply pays a death benefit if you die during the term; there’s nothing to borrow against.

Most insurers let you borrow up to roughly 90% of the current cash value. The loan is secured by the policy itself, meaning your insurer holds your cash value as collateral — no credit check or income verification needed.

Why People Assume All Life Insurance Works This Way

The confusion usually comes from the word “insurance.” If you can borrow against your car’s value or your home’s equity, it’s natural to assume the same goes for life insurance. But the key difference is that only permanent policies build a cash reserve you can tap.

• Term life policies: No cash value, no borrowing possible. Coverage ends when the term ends, and there’s nothing to withdraw or borrow from.
• Whole life policies: Build cash value at a guaranteed rate set by the insurer. Borrowing is available once enough value accumulates.
• Universal life policies: Cash value grows based on current interest rates, with some flexibility in premium payments. Policy loans are typically allowed.
• Variable life policies: Cash value is invested in sub-accounts (similar to mutual funds). You can borrow against it, though the value fluctuates with market performance.
• Group life insurance: Employer-provided coverage is usually term insurance and doesn’t offer loans. Check with your HR department if you’re unsure.

Another common assumption is that policy loans are free money. They’re not — interest accrues on the borrowed amount, and unpaid loans reduce the death benefit your beneficiaries receive.

How the Borrowing Process Unfolds

Requesting a life insurance policy loan is simpler than a bank loan but still involves paperwork. You contact your insurer, fill out a loan request form, and the policy serves as complete collateral. The mechanism is straightforward, as outlined in Protective’s life insurance policy loan definition: you borrow against the cash value that has accumulated over time.

Once approved, the funds are typically sent by check or direct deposit within a few business days. There’s no restriction on how you use the money — the insurer doesn’t require a reason. You can cover a medical bill, make a home repair, or pay tuition.

Life insurance loans generally offer lower rates than unsecured options. The trade-off is that your policy’s cash value is at risk if you don’t repay.

Repayment, Interest, and the Fine Print

One of the most attractive features is the flexible repayment schedule. There is often no mandatory minimum payment or fixed timeline. You can make periodic payments, pay interest annually, or repay the full loan as a lump sum.

1. Pay only the interest each year: Keeps the loan alive without growing the balance. If you miss a payment, the interest capitalizes and starts accruing interest itself.
2. Make periodic principal payments: Reduces the loan balance gradually, which helps preserve cash value and death benefit over time.
3. Repay in a lump sum: Clears the loan and restores full cash value and death benefit, assuming no interest has been left unpaid.
4. Let the loan ride until death: The outstanding balance (principal plus interest) is deducted from the death benefit, reducing what your beneficiaries receive.

Before borrowing, review your policy’s loan interest rate and any fees. Some insurers charge a small origination fee or impose a waiting period — often one to two years after the policy starts — before loans are available.

The Risks You Shouldn’t Ignore

A policy loan immediately reduces the cash value of your policy. That leaves fewer funds available to cover the interest that accrues on the loan. Over time, if unpaid interest accumulates and the total loan amount exceeds the cash value, the policy could lapse.

If a policy lapses with an outstanding loan, the IRS may treat the forgiven loan amount as taxable income. You’d also lose the life insurance coverage entirely — a costly outcome for you and your family. New York Life warns that the permanent life insurance only rule means term policyholders never face this risk, but permanent policyholders need to stay on top of their loan balance.

If you need cash quickly and have good credit alternatives, a policy loan is worth considering. But it should not be your first choice if you can get a low-rate personal loan or a home equity line with manageable terms.

The Bottom Line

Borrowing from your life insurance can be a fast, low-cost way to access cash — but only if you own a permanent policy with sufficient cash value. The lack of a credit check and the flexible repayment schedule make it attractive. Just remember that unpaid loans shrink the death benefit for your beneficiaries and can trigger a lapse if the interest grows faster than the cash value.

Before signing a loan form, pull out your latest policy statement and note the current cash value and loan interest rate. A licensed insurance agent or a fee-only financial planner can help you project how the loan will affect your policy’s growth and your family’s long-term protection — something no generic calculator can predict for your specific situation.