Consumer Education Series
How to Borrow Against Your Life Insurance Policy
An Educational Guide from ProGen Insurance
Life insurance is usually thought of as something your family uses after you're gone. But if you have the right kind of policy, it can also be a living financial resource you can tap into while you're still alive.
Many permanent life insurance policies build cash value over time. Once that cash value grows to a certain level, you may be able to borrow against your policy instead of turning to credit cards or personal loans.
This guide explains when you can and cannot borrow from a policy, how the loan process works, pros and cons of using a policy loan, and what happens if you don't repay.
1. Can You Borrow from Your Life Insurance?
Whether you can borrow against your policy depends on the type of life insurance you own.
You generally cannot borrow from:
Term Life Insurance
- -Provides coverage for a set period (10, 20, 30 years)
- -Has no cash value
- -Designed purely for protection, not as a savings asset
Because there is no built-up cash value in term life, there's nothing for the insurer to use as collateral.
You can potentially borrow from:
Permanent Life Insurance, such as:
- Whole Life
- Universal Life
- Indexed Universal Life
- Variable Life
These policies include a cash value component that grows over time. Once that cash value reaches a sufficient amount, your insurer may allow you to borrow against it.
In most cases, you'll need to have the policy for several years before the cash value is large enough to support a meaningful loan.
2. How Borrowing Against Life Insurance Works
When you borrow against your policy, you're not withdrawing your own money in the traditional sense. Instead:
- -The insurance company lends you money, using your cash value as collateral.
- -The loan does not require a credit check, because the policy itself secures the loan.
- -The loan accrues interest, usually at a rate competitive with (or lower than) many personal loans.
- -As long as the loan and accumulated interest are not repaid, they are deducted from the death benefit your beneficiaries receive.
Basic flow of a policy loan:
You request a loan from the insurer.
The insurer confirms your available cash value and maximum loan amount.
You sign loan documents and choose how you want the funds delivered (check, EFT, etc.).
Your loan begins to accrue interest.
You repay on your own schedule (within the rules of the contract), or the outstanding balance is settled from your policy later.
3. When Can You Start Borrowing?
You typically must wait until:
- You own a permanent policy, and
- The policy has built enough cash value to secure the loan.
Cash value growth depends on:
- -How long you've had the policy
- -The premium amount
- -The type of policy (whole, universal, variable, etc.)
- -Dividends or interest credited
In many cases, the first few years of a permanent policy are heavily allocated to insurance costs and fees. It may take several years (often 5+) before the cash value is large enough to use meaningfully.
Some policies let you accelerate growth using features like paid-up additions riders or extra premium contributions (within IRS limits).
4. Step-by-Step: How to Borrow Against Your Life Insurance
Step 1: Confirm Eligibility
Contact your life insurance company or advisor and ask:
- -Is my policy permanent (not term)?
- -What is my current cash value?
- -Does my policy allow policy loans?
- -Is there a minimum or maximum loan amount?
If ProGen Insurance is your advisor, we typically request an in-force illustration from the insurer showing current cash value, death benefit, existing loans (if any), and impact of a potential loan over time.
Step 2: Find Out How Much You Can Borrow
Most insurers allow you to borrow up to a percentage of your cash value, often around 80-90%.
Example:
- - If your policy cash value is $50,000
- - And the carrier allows borrowing up to 90%
- - Your maximum loan may be around $45,000
However, borrowing the maximum available is rarely a good idea. You need a margin to avoid policy lapse if interest accumulates, market performance is poor, or you pause premium payments.
Step 3: Weigh the Pros and Cons
Potential Advantages
No credit check
Approval is based on policy values, not your credit score. Useful if you have limited or damaged credit.
Flexible repayment
Many insurers do not require fixed monthly payments. You may decide how and when to repay.
Competitive interest rates
Policy loan rates often compare favorably to credit card debt, personal loans, and some HELOCs.
Quick access to funds
Once the loan is approved, funds are typically disbursed relatively quickly.
Important Risks
Reduced death benefit
Any outstanding loan plus accrued interest is subtracted from the death benefit.
Risk of policy lapse
If the loan balance + interest exceeds cash value, the policy can terminate and you lose coverage.
Possible tax consequences
If the policy lapses with a loan outstanding, gains may be taxed as ordinary income.
False sense of "free money"
Flexible repayment can tempt people to ignore the loan. Interest compounds and erodes policy value.
Policy loans can be very useful - but they should be taken with a clear repayment plan and professional guidance.
Step 4: Review Loan Terms and Interest
Before proceeding, ask:
- -Current loan interest rate (fixed or variable?)
- -How and when interest is added (annually? monthly?)
- -Can you pay just the interest periodically?
- -Are there any fees for taking or repaying the loan early?
Compare the effective cost of the policy loan to personal loans, HELOCs, and credit cards. In many cases, the policy loan will be more favorable - but not always.
Step 5: Complete the Loan Request
Most insurers make this simple:
- -Online form, phone form, or paper form
- -Specify: Policy number, loan amount, bank deposit details or mailing address
- -For larger loans, some companies may require additional confirmation or documentation
Step 6: Receive Funds
After approval, funds are usually wired or ACH'd to your bank account, or mailed via check. Processing time varies by company, but typically ranges from a few days to a couple of weeks.
Step 7: Repay Responsibly
Life insurance loans are attractive because you control the repayment schedule, but that doesn't mean "never pay it back."
Good practices include:
- At least paying interest annually so it doesn't compound
- Setting a target payoff horizon (for example, 3-5 years)
- Reviewing the policy annually to monitor loan balance, cash value, death benefit, and policy performance
A ProGen advisor can help you model different repayment strategies so the loan supports your goals without endangering coverage.
5. What Happens If You Don't Repay the Loan?
If you decide not to actively repay:
- -The loan balance continues to grow with interest.
- -The insurer may use dividends, interest credits, or other policy values to offset some of the interest.
- -Over time, if the loan plus interest gets too large relative to cash value, the policy may lapse, coverage ends, and you might owe income tax on the gain inside the policy.
If you pass away before repaying the loan:
The insurer simply deducts the loan + interest from the death benefit. Your beneficiaries receive the net amount.
This is why loan strategy must align with your goals:
- If your top priority is maximizing legacy - repay aggressively.
- If your priority is access to cash now, and you're okay with a smaller future death benefit - you may intentionally not pay back principal.
6. What Types of Policies Allow Loans?
Generally Eligible:
Whole Life Insurance
Level premiums, guaranteed cash value schedule, often pays dividends
Universal Life Insurance
Flexible premiums, interest-crediting based on a declared rate or index
Indexed Universal Life (IUL)
Cash value growth linked (indirectly) to a market index
Variable Universal Life (VUL)
Cash value invested directly in subaccounts (stocks, bonds, etc.)
Not Eligible:
Term Life Policies
Pure insurance, no cash value
If you're not sure which type you own, that's a crucial first step.
7. How Much Should You Borrow?
Even if the company allows up to 90%, that doesn't mean it's wise.
A more conservative approach is to:
Borrow far below the maximum, leaving room for market fluctuations (for VUL/IUL), policy charges, and interest accumulation.
Think of policy loans as a strategic tool, not a piggy bank.
We often recommend:
- Using them for big-picture needs (debt consolidation, large expenses, business opportunities), not everyday spending.
- Evaluating alternatives (HELOC, personal loan) so you choose the best combination of cost + risk + flexibility.
8. When Borrowing Against Your Policy Might Make Sense
Good Reasons to Borrow:
- Consolidating high-interest debt into a lower-cost loan
- Funding short-term cash flow needs you know you can repay
- Taking advantage of an opportunity (e.g., business expansion)
- Covering a temporary emergency without ruining your credit
When It Might Not Be a Good Idea:
- You're struggling to pay current premiums
- Your policy is relatively new with low cash value
- Your main goal is to leave the largest possible death benefit
- You don't have a realistic plan to repay or manage the loan
Final Thoughts: Is Borrowing Against Life Insurance Right for You?
Borrowing against your life insurance can be more flexible than a traditional loan, less dependent on your credit score, and competitive in cost, especially versus high-interest debt.
But it comes with real trade-offs:
- A policy loan can reduce or wipe out the death benefit.
- Poorly managed loans can cause a policy lapse and tax bill.
- It should be part of a broader financial plan, not an impulse move.
Frequently Asked Questions
ProGen Insurance: How We Help
At ProGen Insurance, we can help you review your existing life insurance policy, determine if it's eligible for loans, model how different loan amounts affect cash value, death benefit, and long-term performance, coordinate with your tax professional if needed, and build a repayment or exit strategy that aligns with your goals.
This content is for informational purposes only. Please consult a licensed advisor before making any financial decisions.