Can You Borrow Money from Your Life Insurance Policy?

Life insurance isn’t just about protecting your loved ones after you pass away—it can also be a financial tool while you’re still alive. If you have a permanent life insurance policy, you may be able to borrow against its cash value. Life insurance loans can offer quick access to cash without the strict requirements of traditional bank loans. However, borrowing from your policy comes with risks that could impact your long-term financial security.

How Life Insurance Loans Work

Not all life insurance policies allow you to borrow money. This option is only available with permanent life insurance policies that have a cash value component.

Understanding Cash Value Life Insurance

When you pay premiums for a permanent life insurance policy, such as whole life or universal life insurance, part of your payment goes toward building cash value. Over time, this cash value grows tax-deferred and can be used in different ways:

Withdraw funds (may reduce the death benefit)
Surrender the policy for cash (cancels coverage)
Take out a loan against the cash value

A life insurance loan allows you to borrow against the accumulated cash value while keeping your policy in place. However, it’s important to understand the terms before borrowing.

Loan Terms and Interest Rates

Unlike traditional loans, a life insurance loan does not require credit approval since you are borrowing from your own policy. However, it does accrue interest and must be repaid to avoid reducing the death benefit.

Feature	Life Insurance Loan	Traditional Bank Loan
Approval Process	No credit check required	Credit check required
Collateral	The policy’s cash value	Assets or income
Repayment Schedule	Flexible, but unpaid loans reduce the death benefit	Fixed monthly payments
Interest Rates	Typically lower than personal loans, but varies by insurer	Varies based on credit score and lender

Since you are borrowing from your own policy, insurance companies typically charge lower interest rates than banks or credit cards. However, the interest accumulates over time and can eat into your policy’s value if not repaid.

Steps to Borrow from Your Life Insurance Policy

1. Check Your Policy’s Cash Value

Not all permanent life insurance policies build cash value quickly. Contact your insurer to find out how much you have available to borrow.

2. Request a Loan from Your Insurer

Your insurance company will provide forms to request a loan. There’s usually no lengthy approval process since your policy serves as collateral.

3. Understand Interest and Repayment Terms

Interest is charged on the loan, and if unpaid, it compounds over time. Some policies allow you to repay the loan at your own pace, while others have structured repayment plans.

4. Monitor Your Policy’s Health

If your loan balance plus interest reaches the total cash value, your policy could lapse, leaving you without coverage. Keep track of your loan status to avoid this risk.

Risks of Borrowing Against Your Life Insurance

While life insurance loans can be a convenient way to access cash, they come with potential downsides.

1. Reduced Death Benefit

If the loan is not repaid, the insurer will deduct the outstanding balance from the death benefit, leaving less money for your beneficiaries.

2. Policy Lapse Risk

If the loan balance plus accumulated interest grows too large, your policy could lapse, leaving you without coverage and any remaining cash value.

3. Interest Accumulation

Even though the interest rates are often lower than personal loans, they still add up over time, increasing the total amount you owe.

4. Tax Consequences

If the policy lapses with an outstanding loan, the borrowed amount could be considered taxable income. This could result in an unexpected tax bill.

When Borrowing from Life Insurance Makes Sense

A life insurance loan can be a smart financial move in certain situations:

✅ You need emergency funds without going through a credit check
✅ You have a strong repayment plan to avoid long-term interest accumulation
✅ You want to avoid high-interest debt (such as credit card debt)
✅ You’re using the funds for an investment opportunity that could yield higher returns

However, if you don’t have a solid plan to repay the loan, borrowing from your policy can put your coverage at risk.

Alternative Ways to Access Cash

If borrowing against your life insurance doesn’t seem like the best option, consider these alternatives:

Option	Pros	Cons
Personal Loan	No risk to life insurance policy	Requires credit approval and regular payments
Home Equity Loan	Lower interest rates than credit cards	Uses your home as collateral
401(k) Loan	Low interest, repaid to your own retirement account	Must be repaid within a set period or face penalties
Cash Value Withdrawal	No repayment required	Reduces death benefit

Final Thoughts

Borrowing from your life insurance policy can provide quick, low-interest access to cash, but it’s not without risks. If you’re considering a life insurance loan, make sure you understand the potential impact on your policy, death benefit, and long-term financial security. Always have a repayment plan in place and explore alternative financing options before making a decision.