How to Borrow Against Your Life Insurance Policy

Eligibility and Policy Types

Only permanent life policies—such as whole life, universal life, or variable universal life—accumulate cash value that can be borrowed against. Term policies do not build cash value and therefore cannot be used for a loan. To qualify, the policy must be in force, the cash‑value balance must exceed the desired loan amount, and the insurer must allow loans under the contract terms.

Calculating the Loan Amount

Most insurers let you borrow up to a percentage of the available cash value, typically 90 % or less. The exact limit is shown on your policy statement. For example, if the cash value is $50,000 and the insurer permits 80 % borrowing, the maximum loan is $40,000.

Costs and Interest

Loans carry interest that accrues daily and is added to the outstanding balance. Rates vary by company and may be fixed or tied to a benchmark index. Unpaid interest compounds, reducing the policy's cash value and death benefit. Some insurers charge a small administrative fee at loan initiation.

Repayment Options

You can repay the loan at any time, in part or in full, without a fixed schedule. Payments can be made by check, electronic transfer, or automatic deduction from the cash value. If the loan and accrued interest are not repaid before the policy lapses, the outstanding balance is deducted from the death benefit paid to beneficiaries.

Key Considerations

Taking a loan can be a tax‑free way to access funds, but it reduces the policy's cash value and death benefit until repaid. If the loan grows larger than the cash value, the policy may lapse, causing loss of coverage and potential tax consequences. Weigh the urgency of the need against long‑term protection goals, and consult a financial advisor if unsure.