Quick Answer: Can I Borrow From My Life Insurance Policy?
Yes, you can borrow from certain life insurance policies—but only if they have cash value.
This typically includes Whole Life Insurance and some types of Universal Life Insurance. Term life insurance does not allow loans.
Why This Question Matters
Life insurance loans can sound appealing. There is no credit check, and you do not need to explain how the money is used. But borrowing from your policy can also reduce benefits or put coverage at risk.
Understanding how policy loans work helps you avoid costly mistakes.
Which Life Insurance Policies Allow Borrowing?
Policies That Usually Allow Loans
- Whole Life Insurance
- Universal Life Insurance (UL, IUL, VUL)
These policies build cash value, which acts as collateral for a loan.
Policies That Do NOT Allow Loans
- Term Life Insurance
Term life has no cash value, so there is nothing to borrow against.
How Life Insurance Policy Loans Work
When you take a loan:
- You borrow against the cash value, not from the insurer
- The policy remains in force if properly funded
- Interest accrues on the loan balance
- Repayment is optional, but consequences apply
If you pass away before repaying the loan, the outstanding balance plus interest is deducted from the death benefit.
How Much Can You Borrow?
Most insurers allow you to borrow:
- Up to 80–90% of your cash value, depending on the policy
The exact amount depends on:
- Policy type
- Cash value balance
- Insurer rules
A licensed insurance agent can help confirm your available loan amount.
Pros of Borrowing From a Life Insurance Policy
- No credit check
- No required repayment schedule
- Funds can be used for any purpose
- Lower interest rates than some personal loans
Policy loans can offer flexibility during financial emergencies.
Cons and Risks to Consider
- Loan interest reduces cash value
- Death benefit is reduced if the loan is unpaid
- Large loans can cause the policy to lapse
- A lapsed policy may trigger tax consequences
This is especially important with universal life insurance, where underfunding can cause coverage to fail.
Policy Loans vs. Withdrawals
It is important to understand the difference:
| Feature | Policy Loan | Withdrawal |
|---|---|---|
| Repayment Required | No (optional) | Not applicable |
| Interest Charged | Yes | No |
| Reduces Death Benefit | Yes | Yes |
| Tax Risk | If policy lapses | Possibly |
Withdrawals permanently remove cash value and may have different tax implications.
When Borrowing From Life Insurance May Make Sense
- Short-term cash needs
- Emergency expenses
- Temporary income gaps
It may be less suitable for:
- Long-term debt
- Ongoing living expenses
- High loan balances with no repayment plan
Always weigh alternatives before borrowing.
Common Mistakes to Avoid
- Borrowing too much too early
- Ignoring interest accumulation
- Not monitoring policy performance
- Assuming loans are “free money”
Policy loans require ongoing attention.
Frequently Asked Questions
Is borrowing from life insurance taxable?
Loans are generally not taxable, unless the policy lapses or is surrendered. Consult a qualified tax professional.
Do I have to repay the loan?
No, but unpaid loans reduce the death benefit and may cause the policy to lapse.
Can borrowing cancel my life insurance?
Yes. If the loan plus interest exceeds cash value, the policy can lapse.
Can I borrow from employer life insurance?
Usually no. Most employer policies are term life and do not build cash value.
How to Decide If a Policy Loan Is Right for You
Borrowing from life insurance can be useful, but it is not risk-free. It works best when:
- You understand how your policy functions
- The loan is manageable
- You have a plan to monitor or repay it
At InsurVIAlife, we help consumers understand life insurance features and connect them with licensed insurance agents who can explain policy loans clearly and responsibly.
👉 Speak with a licensed agent to review your policy and confirm whether borrowing makes sense for your situation.
Author & Trust Disclosure
This article was prepared by InsurVIAlife, an independent U.S. life insurance education resource. Information reflects general U.S. insurance practices and publicly available guidance from organizations such as LIMRA, NAIC, and the Insurance Information Institute. Content is for educational purposes only and does not provide legal, tax, or financial advice. Always consult a licensed insurance professional or tax advisor for personalized recommendations.
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