How to Borrow Against Life Insurance: Rules, Costs, Risks

You can borrow against a life insurance policy only if it builds cash value, which means permanent coverage such as whole life or universal life. Term life has no cash value to borrow from. Most insurers let you borrow up to about 90% of the cash value you have built up, you pay interest on the loan, and anything you still owe when the insured person dies is subtracted from the death benefit. Done with a plan, a policy loan is a flexible source of cash. Done without one, it can quietly drain the policy you bought to protect your family.

This guide explains which policies qualify, how much you can take, what the loan costs, when taxes enter the picture, how survivorship (second-to-die) policies differ, and what to check before you call your insurer.

TL;DR

Only permanent policies with cash value (whole life, universal life and similar) can be borrowed against. Term life cannot.
Insurers typically allow loans of up to about 90% of the cash value, and it can take years to build enough to borrow.
A policy loan charges interest, has no required repayment schedule with many carriers, and any unpaid balance reduces the death benefit.
Loans from a Modified Endowment Contract (MEC) can be taxable, and may carry an extra 10% tax before age 59½.
Survivorship policies can allow loans too, but the contract terms decide it, so read yours before you count on the money.

Which policies let you borrow
How much you can borrow, and how soon
How a policy loan works
What happens if you don't repay
Taxes: usually simple, until they are not
Before you borrow: a short checklist
Survivorship and second-to-die policies
Our perspective
Get a second set of eyes on your policy
FAQ
Sources

Which policies let you borrow

Cash value is the key. A permanent policy splits each premium between the cost of insurance and a savings-like account inside the contract. That account is the cash value, and it is what secures a loan. The New York Department of Financial Services notes that a whole life policy owner may generally borrow if enough cash value is available to secure the loan.

Here is how the main policy types line up:

Policy type	Builds cash value?	Can you borrow?
Term life	No	No
Whole life	Yes	Yes, once enough cash value exists
Universal life	Yes	Generally yes, depending on the contract
Indexed universal life	Yes	Generally yes, with loan options set by the contract
Survivorship (second-to-die) permanent	Yes, if it is a permanent design	Depends on the contract terms

The last column always comes back to the contract. Your policy's loan provision, found in the policy document or in an annual statement, is the final word on how much you can take, at what rate, and under what conditions.

If you are still deciding which kind of policy to own, our guide to life insurance in Michigan walks through the types and how they are bought. If you hold an indexed policy, our piece on indexed universal life and the risks to watch covers how the cash value behaves over time.

How much you can borrow, and how soon

The cap is a share of the cash value, not the death benefit. NerdWallet reports that insurers typically let policyholders borrow up to about 90% of the cash value they have built. The exact percentage varies by insurer and policy.

The timing matters just as much. The same source points out that it can take years to build enough cash value to borrow against. In the early years, much of each premium goes toward the cost of insurance and policy charges, so the account starts small. A policy bought last year may have very little available.

A simple example

This is a hypothetical illustration, not a quote. Say your whole life policy shows $50,000 in cash value and your insurer allows loans up to 90%. The most you could borrow is $45,000. If the loan rate were 5%, the first year's interest would be $2,250 on the full amount. That interest is a real cost whether you pay it out of pocket or let it add to the loan balance.

Your annual statement or the insurer's online portal normally shows the current cash value and the loan amount available. Ask for that number in writing before making plans around it.

How a policy loan works

A policy loan is different from a bank loan in a few ways that surprise people.

There is no credit check. The cash value is the collateral, so approval is typically a matter of filling out a request form with the insurer.
You are borrowing from the insurer, with your cash value as security. In many contracts your cash value keeps being credited in some form while the loan is outstanding, but how that works differs by policy type and carrier, so ask.
Repayment is flexible. Many policies do not set a required repayment schedule. That flexibility is the appeal, and it is also the danger, because unpaid interest can pile onto the balance.
Funds usually arrive fast. Most insurers process a loan request in days, though timing varies by company.

What it costs: interest rates

Rates are set by the contract and differ by carrier and by how the policy is built. As one example from a carrier's published product page, Securian lists fixed-rate loans at 4%, variable-rate loans tied to Moody's Corporate Bond Yield Average with a 3% minimum, and indexed loans at 5% for policies dated on or after September 15, 2023. That is one product, not a market average. Your own policy may be higher, lower, fixed or variable.

Securian policy loan rate examples compared

When you compare a policy loan to other borrowing, look at three numbers: the loan rate, the rate at which your cash value is credited while borrowed against, and whether interest is due yearly or added to the balance.

What happens if you don't repay

This is the part to understand before you sign anything.

New York's insurance regulator states plainly that any money owed on an outstanding policy loan is deducted from the benefits paid at the insured's death. If you borrow $45,000 and never repay it, your beneficiaries receive the death benefit minus the loan and any accrued interest.

There is a second risk beyond a smaller payout. If the loan balance, with interest, grows until it approaches the cash value, the policy can lapse. A lapse ends your coverage, and it can also create a tax bill, which is covered in the next section. Watch for the warning notices your insurer sends as the balance climbs, and respond to them early.

Investopedia adds a related point: taking money out of a permanent policy can deplete the accumulation needed to maintain guarantees and may require higher premiums. A loan can change how the policy performs, not just how much it pays.

Ways to keep a loan under control:

Pay at least the annual interest so the balance does not grow.
Ask your insurer for an in-force illustration showing how the policy performs with the loan outstanding.
Set a calendar reminder to review the loan balance against the cash value every year.
Decide at the start whether you plan to repay in full, and by when.

Taxes: usually simple, until they are not

Policy loans are often discussed as tax-advantaged, but the answer depends on the type of policy and how you manage it. Talk with a tax professional or CPA about your own case before taking a large loan.

The clearest federal rule in our research involves a Modified Endowment Contract. A policy becomes a MEC when it is funded faster than federal limits allow. For a MEC, IRS guidance says loans and pledges are generally treated as non-annuity distributions on an income-out-first basis, and the taxable amounts may face an additional 10% tax before age 59½, subject to exceptions. In plain terms: a loan from a MEC can be taxed like a withdrawal of earnings, and the early-withdrawal penalty can apply if you are under 59½.

If you paid large lump sums into a policy, or you are unsure whether your policy has MEC status, ask the insurer. Statements and annual reports often say.

Before you borrow: a short checklist

The National Association of Insurance Commissioners advises that before making changes to a policy, you should consider all available options, including whether existing cash value can meet immediate needs rather than selling the policy in a life settlement. A loan is one of those options, so it is worth weighing it properly.

Work through these questions:

What is the money for? A one-time need with a clear payback plan suits a loan better than ongoing spending.
What is the loan rate, and is it fixed or variable? A variable rate can rise.
How will I repay it, and by when? Write a plan, even if the policy does not require one.
Will the loan change my death benefit? Yes, if it is unpaid at death. Is that acceptable for the people relying on this policy?
Is the policy a MEC? If yes, expect tax consequences.
Does the policy have riders or guarantees that a loan might affect? Ask the insurer in writing.

Our article on how advisors review life insurance policies covers three checks worth running before you change anything. If your policy has riders, which life insurance riders are worth the cost helps you see what you may be giving up or already paying for.

Other ways to reach your policy's value

A loan is not the only door. Depending on your policy and health, you may also have:

Partial withdrawals or surrenders, which reduce the cash value and may reduce the death benefit permanently.
Living benefits, which let some policies pay out part of the death benefit early if you face a qualifying illness. See our guide to living benefits and when to use them.
Selling the policy through a life settlement, which the NAIC document above recommends considering only after weighing your other options.

Each of these changes what your family receives, so compare them side by side with the loan.

Survivorship and second-to-die policies

A survivorship policy, also called second-to-die, insures two people and pays its benefit only after the second one dies. These are often used for estate planning, where the goal is to provide funds when the final spouse passes.

Can you borrow against one? It depends on whether the policy is a permanent design with cash value. Securian's Eclipse Survivor II, for example, is a second-to-die indexed universal life policy with potential cash value accumulation and policy-loan options, with proceeds payable after the second insured dies. That is one product, so do not assume yours works the same way.

Loan conditions on survivorship contracts can include requirements about the insureds. An SEC filing for a survivorship variable universal life product shows that loan provisions can require that at least one insured be living and that the contract not be in default. Read the loan section of your own contract for similar language.

Two practical points for survivorship owners:

Cash value in these policies often builds slowly, because the premium is shaped around two lives and a later payout. Check your statement before you plan around a loan.
If the policy is part of an estate or trust strategy, a loan can interfere with the goal the policy was bought for. Involve your attorney and advisor before borrowing.

Our perspective

A policy loan looks easy because nobody asks questions. There is no application grilling and no credit pull. That ease is exactly why we suggest slowing down and treating it like any other major financial decision.

In our experience, the people who use these loans well start with the end in mind. They know how much cash value they truly have, what the loan rate is, how they will pay it back, and what the death benefit will look like if they do not. The people who run into trouble tend to borrow first and read the policy later.

As licensed advisors who work with multiple carriers, we can look at your actual policy, pull the numbers that matter, and help you compare a loan against other routes, such as living benefits or changing coverage. Our advice is at no cost to you, and we stay with you as your needs change, whether that is retirement, a health event, or a change in what your family relies on.

If you are already retired or close to it, our article on what to do before you cancel life insurance coverage is a good companion to this one.

Brian

Get a second set of eyes on your policy

If you are thinking about borrowing against a policy, or you are unsure what you own, we can review it with you and explain your options in plain language. We help Michigan residents and clients nationwide with life insurance, Medicare, health coverage and retirement-related planning. You can see everything we do on our services page, or start at our home page.

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FAQ

Can I borrow against term life insurance?

No. Term life covers a set period and does not build cash value, so there is nothing to secure a loan. Only permanent policies such as whole life or universal life accumulate cash value you can borrow against. If you own term coverage and want that flexibility, ask about your conversion options before the conversion window closes.

How long do I have to wait before I can borrow?

There is no single answer, because it depends on how fast your policy builds cash value. NerdWallet notes that building enough cash value can take years. Your insurer's portal or a written request will show how much is currently available to borrow.

Do I have to pay back a life insurance loan?

Many policies do not set a required repayment schedule, but the loan is still a debt. Interest accrues, and any outstanding balance is deducted from the death benefit. If the balance grows too large relative to the cash value, the policy can lapse, so a repayment plan protects both your coverage and your beneficiaries.

Is money borrowed from life insurance taxable?

It depends on the policy. For a Modified Endowment Contract, IRS guidance treats loans as distributions taxed income-first, and an extra 10% tax may apply before age 59½. Ask your insurer whether your policy is a MEC, and confirm your situation with a tax professional.

Can I borrow against a second-to-die policy?

Possibly, if the policy is a permanent type with cash value and its loan provisions allow it. Contracts can set conditions, such as at least one insured being alive and the policy not being in default. Check the loan section of your contract or ask your insurer.

Sources