Can you borrow from a life insurance policy?

If you have a whole life or universal life insurance policy, you may be sitting on a financial resource you have not fully considered. These permanent policies build cash value over time, and that cash value can be borrowed against—often quickly and without a credit check. But policy loans come with real risks, and borrowing carelessly can cost you your coverage.

How policy loans work

When you borrow against your life insurance, you are not withdrawing your own money. You are taking a loan from the insurance company, using your policy's cash value as collateral. The insurer keeps your cash value intact and earning interest while it lends you money against it. There is no application, no credit check, and no required repayment schedule. You can repay it on your own timeline—or not at all.

What policy loans cost

Policy loans are not free. The insurer charges interest on the loan balance, typically ranging from 5% to 8% annually depending on the policy. If you do not make interest payments, the unpaid interest is added to the loan balance, which grows over time. This is where borrowers get into trouble:

• Unchecked interest: A loan left unpaid can grow until it exceeds the policy's cash value, triggering a lapse.
• Reduced death benefit: Any outstanding loan balance at the time of your death is deducted from the payout your beneficiaries receive.
• Tax consequences: If the policy lapses while a loan is outstanding, the IRS treats the unpaid balance as taxable income.

When borrowing makes sense

A policy loan can be a smart option in specific situations. Because there is no credit check and no fixed repayment schedule, it can bridge a short-term cash need without disrupting your finances. Common situations where it works well include covering emergency expenses, funding a large one-time purchase, or supplementing retirement income. It is generally most appropriate when you plan to repay the loan relatively quickly and when the death benefit is not urgently needed at its full amount.

When you should think twice

Borrowing from your policy works against you when the loan is large, the interest compounds unchecked, and your policy's cash value cannot keep pace. If you depend on your life insurance to provide a specific death benefit for your family—to replace income, cover a mortgage, or support dependents—an outstanding loan erodes that protection quietly in the background. It is also a poor strategy for long-term financing needs where a conventional loan with a fixed payoff might be cheaper and more disciplined.

What Truscott recommends

Policy loans are a legitimate financial tool, but they require careful management to avoid unintended consequences for your coverage and your family. A Truscott policy checkup can review your current cash value, model the impact of a loan on your death benefit, and help you decide whether borrowing is the right move for your situation. Reach out before you tap your policy—so you know exactly what you are getting into.