Can I borrow against my life insurance cash value and how does it work?

Permanent life insurance policies — whole life, universal life, and IUL — accumulate cash value that can be borrowed against through a policy loan. Understanding how policy loans work helps you use this feature effectively without inadvertently jeopardizing your coverage.

How policy loans work: you borrow against your accumulated cash value from the insurance carrier. The loan is not required to be repaid on any schedule — it simply accrues interest. Unlike bank loans, there is no credit check, no application, and no approval process. You can typically borrow up to 90% of the accumulated cash value.

The death benefit implication: unpaid policy loans (plus accrued interest) are deducted from the death benefit paid to beneficiaries. A $1,000,000 policy with a $200,000 outstanding loan pays $800,000 at death (simplistically). The policy itself remains in force as long as the cash value covers the loan balance plus accrued interest.

Policy lapse risk: if the loan plus interest grows to exceed the cash value, the policy may lapse — creating a potentially significant taxable event for the gains accumulated. Monitoring loan balances relative to cash value is essential.

Tax treatment: policy loans are not taxable income. However, if the policy lapses with an outstanding loan, gains above your cost basis may become taxable. Agents in our network can explain the tax implications of policy loans for your specific situation. Actual outcomes vary by policy terms.