Can you borrow from a life insurance policy?

Yes, you can borrow from a permanent life insurance policy—such as whole life or universal life—once it has built up enough cash value. Policy loans do not require a credit check, an application, or approval from a lender. You are essentially borrowing against your own money, using the cash value as collateral. However, there are important costs and risks to understand before taking a loan.

How policy loans work

You request a loan from your insurance company, specifying the amount you want up to a maximum (typically around 90 percent of your cash value). The insurer issues the funds, usually within a few days. Your cash value continues to earn interest on the full amount, including the portion backing the loan. The insurer charges interest on the loan at a rate specified in the policy, often between 5 and 8 percent.

Repayment is optional—but risky to skip

There is no required repayment schedule. You can repay the loan on your own terms, or not at all. However, interest accrues on the outstanding balance. If you do not repay:

• The death benefit is reduced: Your beneficiaries receive the death benefit minus the outstanding loan balance and accrued interest.
• The policy could lapse: If the loan balance plus interest exceeds the cash value, the policy may lapse, terminating coverage and potentially triggering a taxable event.

Tax implications

Policy loans are generally not taxable as income while the policy remains in force. However, if the policy lapses or is surrendered with an outstanding loan, the loan amount may be treated as taxable income to the extent it exceeds your cost basis (total premiums paid).

When borrowing makes sense

Policy loans can be a useful source of liquidity for short-term needs—an emergency expense, a bridge loan, or a large purchase—especially when other borrowing options carry higher interest rates or require credit approval. They work best when you have a plan to repay the loan and maintain the policy's integrity.

What Truscott recommends

Borrowing from your life insurance should be a deliberate decision, not a casual one. Before taking a loan, understand how it affects your death benefit and the long-term health of your policy. A Truscott coverage review will show you your available cash value, the loan terms, and what happens under different repayment scenarios. Contact us before you borrow so you make an informed choice.