How do whole life policy loans work?

A policy loan allows you to borrow against the cash value in your whole life policy without the need for credit checks, income verification, or a repayment schedule. The cash value serves as collateral. Most carriers allow loans up to 90–95% of your accumulated cash value.

Policy loans are not treated as taxable income in most circumstances, regardless of the amount borrowed—as long as the policy remains in force. Interest accrues on the outstanding loan balance at a rate specified in your policy contract, typically 5–8%. Unpaid interest is added to the loan balance.

If you repay the loan plus accrued interest, your full cash value and death benefit are restored. If you do not repay, the outstanding loan balance (principal plus interest) is deducted from the death benefit when you die, or from the cash value if you surrender the policy.

Loan mismanagement can cause a policy to lapse if the outstanding loan exceeds cash value, which could create a taxable event on any gains. This risk is manageable with proper planning. Policy loans are a flexible, tax-advantaged way to access cash value for any purpose—home improvements, business investments, or retirement income.