How do policy loans work on permanent life insurance?

A policy loan allows you to borrow against the cash value of a permanent life insurance policy (whole life, universal life, or IUL) without surrendering the policy or triggering a taxable event. The cash value serves as collateral, and you do not need to qualify, undergo a credit check, or explain how you'll use the funds.

Interest accrues on the outstanding loan balance, typically at a fixed rate (often 5-8%) or a variable rate depending on the carrier and product. Interest can be paid annually or allowed to accrue and compound. Unpaid loan balances plus accrued interest reduce the death benefit paid to beneficiaries.

Policy loans are not considered taxable income. You are not required to repay them. However, if the loan balance plus accrued interest grows to exceed the policy's cash value, the policy may lapse—potentially triggering a taxable event on accumulated gains. The overloan protection rider can prevent this in some policies.

Accessing cash value through a policy loan is one of the primary strategies used in permanent life insurance retirement planning. Unlike withdrawing from a 401(k) or IRA, there are no RMDs, no 10% early withdrawal penalty, and no income tax on the loan proceeds. However, the policy's long-term death benefit is reduced, and ongoing loan management matters.