How to Borrow Against Life Insurance: The Complete Guide

By Life Credit Company | Updated March 2026 | Borrowing Against Life Insurance

Your life insurance policy might be doing more for you than you realize. Most people think of life insurance as something that pays out when they die. But if you have a permanent policy — whole life, universal life, or variable life — there's a good chance it's quietly building cash value right now. And that cash value can be borrowed against while you're still alive.

This guide covers everything you need to know about how to borrow against life insurance: which policies allow it, how the process works, what it costs, the real risks involved, and when a different option might serve you better.

Can You Borrow Against Life Insurance?

The short answer: yes, if you have a permanent life insurance policy with accumulated cash value. The longer answer involves understanding which policies qualify and why.

Life insurance comes in two broad categories: term and permanent. Term policies cover you for a set period — 10, 20, or 30 years — and that's it. No cash value, no loan option. When you stop paying premiums, coverage ends. There's nothing to borrow against.

Permanent policies are different. They stay in force as long as you pay premiums, and a portion of each premium payment goes into a cash value account that grows over time. That cash value is yours to access — either through a withdrawal or by taking a loan against it.

Which Policy Types Allow Borrowing?

• Whole Life Insurance — Builds guaranteed cash value at a fixed rate. Most straightforward for policy loans.
• Universal Life Insurance (UL) — Flexible premiums and adjustable death benefit; cash value grows based on current interest rates.
• Variable Universal Life (VUL) — Cash value tied to investment sub-accounts; loan amounts fluctuate with market performance.
• Indexed Universal Life (IUL) — Cash value grows based on a stock market index (like the S&P 500), subject to a cap and floor.
• Term Life Insurance — Generally does not build cash value; borrowing is not available unless the policy has a "return of premium" rider or has been converted to a permanent policy.

How Borrowing Against Life Insurance Works

A life insurance loan is not the same as a bank loan. You're not actually borrowing from your policy — you're borrowing from the insurance company using your cash value as collateral. The cash value stays in your account and continues to earn interest or dividends. The insurer essentially fronts you money against the value of what you've built up.

This distinction matters for two reasons. First, there's no underwriting — no credit check, no income verification, no application approval process like a traditional loan. Second, you're not legally required to repay it. The loan simply sits there, accruing interest, until you either pay it back or die — in which case it's deducted from the death benefit paid to your beneficiaries.

Step-by-Step: How to Take a Policy Loan

1. Check your cash value balance. Call your insurer or log into your online account. Not every policy has enough accumulated value to make a loan worthwhile.
2. Request the loan. Contact your insurance company directly. Most have a simple loan request form — either online or by mail.
3. Choose your loan amount. You can typically borrow up to 90% of your cash value. Borrowing the maximum leaves almost no cushion if interest starts compounding.
4. Receive the funds. Most insurers process policy loans within 3–10 business days. Funds arrive by check or direct deposit.
5. Track the interest. Interest accrues on the outstanding balance. If you don't pay it, it adds to the loan balance.
6. Repay on your schedule — or don't. There's no mandatory repayment schedule. But understand the consequences of not paying back (covered below).

How Much Can You Borrow?

The borrowing limit is typically up to 90% of your accumulated cash value. The remaining 10% acts as a buffer against the loan balance exceeding the cash value (which would trigger a policy lapse).

Here's a simple example: If your whole life policy has built up $80,000 in cash value, you could borrow up to $72,000. If your policy is newer and has only $10,000 in cash value, your loan ceiling is around $9,000.

The amount you can borrow grows over time as the cash value increases. This is one reason why people who have held permanent policies for 20+ years have more flexibility — their cash value has had time to compound.

What Does It Cost to Borrow Against Life Insurance?

Policy loan interest rates are generally lower than most other borrowing options. Typical rates run between 5% and 8% per year, though some policies charge as low as 4% or as high as 9%.

There are two types of interest structures:

• Fixed-rate loans — The interest rate is set in the policy and doesn't change. Common in traditional whole life policies.
• Variable-rate loans — The rate fluctuates based on a benchmark rate. More common in universal life policies.

Some participating whole life policies offer "wash loans" or "net-cost" loans where the dividend credited to your cash value essentially offsets the loan interest, making the effective borrowing cost close to zero. Ask your insurer if your policy qualifies.

Pros of Borrowing Against Life Insurance

• No credit check required. Your creditworthiness is irrelevant — the loan is secured by your cash value.
• No underwriting or approval process. You don't have to prove income or explain the purpose of the loan.
• Flexible repayment. There's no fixed repayment schedule. Pay when you can, or repay in a lump sum.
• Generally tax-free. Policy loans are not considered income and are not taxed (with important exceptions — see our tax guide).
• Cash value keeps earning. The portion of your cash value used as collateral typically continues to earn dividends or interest.
• Competitive interest rates. Usually 5%–8%, which is often lower than credit cards, personal loans, or home equity loans.
• Fast access to funds. Most loans fund within a week — often faster than a bank loan.

Cons of Borrowing Against Life Insurance

• Reduces death benefit. Any outstanding loan balance is subtracted from what your beneficiaries receive.
• Risk of policy lapse. If your loan balance grows larger than your cash value — due to unpaid interest compounding — your policy can lapse. This is the most serious risk.
• Potential tax consequences on lapse. If the policy lapses with an outstanding loan, the loan amount may become taxable income.
• It takes years to build sufficient cash value. Newer policies may not have enough cash value to make a meaningful loan.
• Interest compounds silently. If you're not actively monitoring the loan, interest can grow quietly until it threatens the policy.

Requirements to Borrow Against Life Insurance

To take a policy loan, you generally need to meet these conditions:

• You hold a permanent life insurance policy (whole life, UL, VUL, or IUL)
• The policy has accumulated sufficient cash value — typically at least a few thousand dollars, though policies in their first 1–3 years may have very little
• Premiums are current (the policy is in good standing)
• You are the policy owner (not just the insured)

There is no minimum age requirement, no health requirement, and no employment requirement. This is one of the most accessible forms of borrowing available to permanent life insurance holders.

When Borrowing Against Your Policy Makes Sense

A policy loan can be a smart move in specific circumstances:

• You need cash quickly and don't want a credit inquiry
• You have a high-value whole life policy with substantial cash value
• You plan to repay the loan within a few years to preserve the death benefit
• You want to bridge a short-term financial gap without touching retirement accounts
• You're a business owner using a policy loan for business financing

Alternatives to Borrowing Against Life Insurance

A policy loan isn't always the best move. Here are the main alternatives:

Cash Value Withdrawal

Instead of a loan, you can withdraw cash directly from your cash value. Withdrawals up to your basis (what you've paid in) are tax-free. But unlike a loan, withdrawals permanently reduce the cash value and death benefit and cannot be "repaid."

Policy Surrender

You can cancel the policy entirely and receive the full cash surrender value. You lose the death benefit completely, and you may owe taxes on gains above your cost basis. This is a last resort for most people.

Life Settlement

If you're age 65 or older, you may be able to sell your policy to a life settlement company for more than its cash surrender value. This is worth exploring before surrendering a policy.

Living Benefit Loans (for Seriously Ill Policyholders)

If you have a serious illness — including cancer — and hold a qualifying life insurance policy, you may be eligible for a Living Benefit Loan. Programs like Life Credit's allow you to borrow against the death benefit value of your policy — not just the cash value — which means larger loan amounts and faster access to funds.

This option is specifically designed for people in difficult health situations who need financial relief now. Life Credit connects qualifying patients with licensed providers who offer these loans. Learn how it works here, or contact us to see if you qualify.

Frequently Asked Questions

Can you borrow against a term life insurance policy?

Generally no. Term policies don't build cash value, so there's nothing to borrow against. However, if your term policy has a conversion option, you can convert it to a permanent policy and then begin building cash value. See our full guide: Can You Borrow Against Term Life Insurance?

How does a life insurance loan affect my beneficiaries?

Any outstanding loan balance at the time of your death is deducted from the death benefit. If your policy has a $500,000 death benefit and you have a $50,000 outstanding loan, your beneficiaries receive $450,000. Accrued interest also reduces this amount.

Is a life insurance loan the same as a personal loan?

No. A policy loan doesn't require a credit check, has no fixed repayment schedule, and uses your cash value as collateral. It functions more like a line of credit secured by your policy's savings component.

What is the interest rate on a life insurance loan?

Typically 5%–8% annually. Some participating whole life policies offer "wash loans" where the dividend credits offset the interest, making the net cost very low. See our detailed comparison: Life Insurance Loan Interest Rates Explained.

Can you have multiple loans against the same policy?

Yes. Most insurers allow you to take additional loans against remaining cash value, as long as the total outstanding balance doesn't exceed the borrowing limit (usually 90% of cash value).