Borrowing Against Life Insurance: How Policy Loans Work

Can You Borrow Against Life Insurance?

You can borrow against life insurance if your policy builds cash value, which means permanent life policies like traditional whole life insurance and universal life insurance qualify. Term life policies don’t build cash value, so there’s nothing available to borrow against.

If you have term coverage and need cash, you’ll need to look at other short-term borrowing options outside the policy.

How Borrowing Against Life Insurance Works

Borrowing against life insurance means you take out a loan from the life insurance company using your policy’s cash value component. You’re not pulling from the entire death benefit, and you can’t borrow the full amount of your coverage. Instead, the insurer lends you money based on the cash value you’ve built over time, and any unpaid balance will be deducted from your death benefit later.

There’s no credit check and the money is usually available quickly, but it’s important to understand how the loan works, how interest adds up, and how to keep the policy healthy while the loan is outstanding.

How Much Can You Borrow Against Life Insurance?

The amount you can access depends on how much cash value you’ve built.  But typically, most insurers allow borrowing up to 90%¹ of the policy’s accumulated cash value as loan once minimum amounts have been met.

The loan doesn’t come directly out of that cash value, but the company uses it to determine how much they can safely lend you while making sure your policy stays in place. Once you have enough cash value, you can usually access funds quickly without a credit check.

How Soon Can You Borrow From Your Life Insurance Policy?

You can borrow once your policy has enough cash value to support a loan. This usually takes a few years, depending on how long the policy has been active and how much you’ve paid in premiums. Cash value typically grows slowly in the early years, so most people can’t borrow right away, even with permanent coverage.

Life insurance also has built-in safeguards to prevent people from pouring in a large lump sum just to pull it back out immediately. If you “overfund” a policy too quickly, it can become a Modified Endowment Contract (MEC), which changes the tax treatment and removes many of the advantages people expect from cash value.

Life insurance companies also follow strict anti–money laundering rules, so unusually large deposits and quick withdrawals trigger tighter restrictions. These protections help ensure the policy is used for long-term coverage, not as a short-term financial loop.

Step-by-Step: How to Borrow Against Life Insurance

1. Contact insurer: To initiate the process, contact your life insurance company or log in to your online account.
2. Confirm availability: Review your current cash value and confirm how much you can borrow.
3. Submit request: Based on the available limit and your need, submit a policy loan request, usually online or through a simple form.
4. Receive funds: Choose how you want to receive the funds, such as direct deposit or check.
5. Choose interest handling: Decide whether you’ll make interest payments or let interest accrue.
6. Monitor policy: Monitor your loan balance to make sure your policy stays in good standing.

How the Loan Amount Is Determined

Your available loan amount depends on your life insurance policy’s cash value. Most companies let you borrow a percentage of that value instead of the full amount, which means the policy can stay active. The exact limit varies by company and policy type, but the loan is essentially secured by your cash value. As long as there’s enough value in the policy, you can access funds quickly.

Interest, Repayment, and Tax Considerations

Interest starts accruing as soon as you take out the loan. You’re not required to make payments on a set schedule, but the balance will grow if you let interest roll over. If unpaid interest causes the loan to exceed your cash value, the policy could lapse. And if a policy lapses with an outstanding loan, the amount you borrowed may become taxable. Staying on top of interest is the best way to keep your coverage protected.

Read: How Does Private Placement Life Insurance Work?

Which Life Insurance Policies Allow Borrowing?

Only certain types of life insurance build cash value, and that cash value is what makes borrowing possible. Here’s how each policy type handles loans and why some work better than others.

• Whole Life: The most straightforward option for borrowing with guaranteed cash value growth. Many people choose whole life specifically because the loan feature offers predictable access to cash when needed.
• Universal Life (Fixed): Cash value growth depends on flexible premiums and changing interest rates. If you’ve consistently funded the policy, you can usually borrow once enough value has built up.
• Indexed UL (IUL): Index-linked cash value growth, subject to caps, floors, and policy fees that give upside potential with a layer of protection from negative market years. Borrowing is typically allowed once the cash value has grown enough to still fund the underlying death benefit.
• Variable UL/Variable Life: Offers higher potential for strong cash value growth through investment-style subaccounts. You can borrow money from any accumulated cash value, but that value can rise and fall with the market. Timing matters, as borrowing during a market dip can reduce your protection if values fall too far.
• Term Life: These policies don't build cash value, so there’s nothing to borrow against. Term coverage is designed strictly for protection.

Life Insurance Loan Comparison Table

Policy Loan vs Cash Value Withdrawal

Before you look outside your policy, the other option to access funds is to withdraw cash from it. It’s different from a policy loan. A withdrawal permanently takes money out of your cash value. It can lower your death benefit, and unlike a loan, the amount you withdraw can’t be added back later.

Which Option Is Better?

If you have decided to access funds from your policy, the right choice depends on your life goals and situation. A policy may make sense if you are sure of repaying the loan and can utilize the tax-free benefit. On the other hand, a withdrawal may fit better if you don’t intend to repay the amount.

Note: both withdrawals and loans reduce the death benefit for the beneficiaries.

Read: What are Living Benefits of Life Insurance?

Pros and Cons of Borrowing Against Life Insurance

A life insurance loan can be a flexible way to access cash, but it comes with trade-offs that can affect your long-term coverage. Here are some of its advantages and disadvantages that you should keep in mind before making a choice.

Pros of Borrowing Against Life Insurance

• Since your policy’s cash value secures the loan, you don’t need a credit check or formal approval.
• You can use the money for anything, such as unexpected bills, home repairs, or even short-term financial gaps.
• As long as your policy stays active, the loan typically doesn’t show up on your credit report or affect your credit score.

Cons of Borrowing Against Life Insurance

• Interest continues to build until the outstanding loan and any accrued interest is repaid, which means the balance can grow if you’re not watching it.
• Unpaid amount is deducted from the death benefit, reducing what your family would receive.
• If the loan ever grows larger than your cash value, the policy could lapse, potentially creating an unexpected tax bill and ending your coverage altogether.

Risks to Understand Before Taking a Policy Loan

Though borrowing against a life insurance policy is convenient, it comes with risks that most people are not aware of. Here are some key risks to be cautious of:

• As the loan balance is unpaid, interest keeps accruing on the outstanding balance. 
• Unpaid loan balances, including both principal and interest, reduce the death benefit payout for the beneficiaries. 
• Borrowing against the cash value means slower cash value growth, as the portion tied to the loan earns less interest. 
• Loans against your life insurance may also lead to policy lapse if the outstanding loan exceeds the available cash value.
• If your policy lapses with an outstanding loan, there may be potential tax consequences on the borrowed amount.

Not knowing the possible risk can hamper your ability to manage your policy effectively. It’s good to weigh all pros and cons before borrowing a loan so that it keeps up with this core purpose of offering financial security.

When Borrowing Against Life Insurance Makes Sense

Borrowing against life insurance can be a helpful way to handle short-term needs, especially when you want fast access to cash without a credit check. It may specifically fit well with some people’s specific situation. Here’s who it might be best for:

• Who’ve had their permanent life insurance policies active for several years to build a meaningful cash value.
• Who need temporary cash access and can make timely repayment to leave minimal impact on long-term coverage.
• Who want flexible repayment terms unlike traditional loans that don't allow fixed payoff dates
• Who are not able to get a loan due to a bad credit score. Policy loans are secured by the policy’s cash value, and there are no credit checks or income verification.

When It’s Not a Good Idea

A policy loan isn’t always the right solution, even if you have cash value available. Here’s when it might not make sense for you:

• If your policy is still in its early years and the cash value is small, borrowing could put the coverage at risk by tightening the margin needed to keep it active.
• It’s also not ideal if you’re unlikely to monitor the loan or pay interest, since unmanaged balances can snowball over time. 
• If the money is for a long-term need rather than a short, temporary expense, another type of financing may be a better fit.

The key is making sure the loan stays manageable so your coverage remains strong. When you understand how cash value, interest, and repayment work together, it’s easier to decide whether a policy loan fits your situation.

Read: Can You Get Life Insurance with a Pre-Existing Condition?

Alternatives to Borrowing From Life Insurance

Borrowing against the cash value on your life insurance policy loan is not the only way to access funds. Depending on your life situation and financial needs, you may access various options with varying risk tolerance

Cash Value Withdrawal:

Before you look outside your policy, the other option to access funds is to withdraw from your life insurance’s accumulated cash value growth.  It’s different from a policy loan. While both mean accessing cash value while alive, a withdrawal doesn’t require repayment.  However the policy could still lapse if the cash value cannot cover the cost of insurance.

Here are some other alternatives to access funds that may not impact your long-term coverage.

Personal loan:

You can access funds with fixed repayment schedules without any impact on your policy. This can be a good option to meet short-term needs, but rates may be higher than policy loans, and approval is subject to credit history.

Home equity lines:

If you own a home, borrowing against its equity can be another option sometimes at a lower interest rate. This option can offer predictable payments without touching your life insurance at all. But your home is kept as collateral, and closing fees and charges may apply.

Credit Cards:

If you need short-term finances for smaller or immediate expenses, you may also access funds through a credit card. But ensure on-time payments, as if balances aren’t paid promptly, interest charges could be high.

Using savings:

If you have sufficient savings or you’ve maintained an emergency fund, accessing these can help you avoid debt altogether. Thus, no interest, no fees, and no repayment pressure. But, make sure you don’t deplete the funds completely.

You can access the option of your choice, depending on what fits in your financial picture. But the right choice depends on how quickly you need the funds and how important it is to keep your policy exactly as it is.