Licensed insurance producer and co-founder of Wealth Nation · Updated October 2026
Most people think of life insurance as something that only pays out when you’re gone. But a whole life policy with cash value can also be a source of money you can reach while you’re living, for an emergency, a big purchase, or an opportunity. The tool that makes that possible is the policy loan. Used with a plan, it’s one of the most flexible features of whole life. Used without one, it can quietly shrink what your family receives. Here’s how it really works.
The short answer: You can borrow against a permanent life insurance policy that has built cash value, such as whole life. The insurance company lends you money and uses your cash value as collateral, so there’s no credit check and no required repayment schedule. Loans charge interest, and any unpaid loan balance plus interest is subtracted from the death benefit. If the loan grows too large, the policy can lapse, which can also create a tax bill. Loans generally aren’t taxable while the policy stays in force and isn’t a Modified Endowment Contract (MEC).
How a policy loan works
When you take a policy loan, you aren’t withdrawing your cash value. You’re borrowing from the insurance company, and your cash value secures the loan.
- Your cash value stays in the policy. It continues to grow on its guaranteed basis. Depending on how the policy is designed, dividends on the borrowed portion may be credited differently while a loan is outstanding, so ask how your policy treats loans.
- The insurer charges interest. Some policies offer a fixed loan rate; others use a variable (adjustable) rate that can change each year. Unpaid interest is added to the loan balance.
- You choose how and when to repay. There’s no required schedule, but the balance keeps growing with interest until you pay it down.
- The death benefit is reduced by anything you owe. If you pass away with a loan outstanding, your beneficiaries receive the death benefit minus the loan and interest.
What kind of policy can you borrow against?
You can borrow against permanent life insurance that builds cash value, most commonly whole life. Term life insurance has no cash value, so there’s nothing to borrow against.
Cash value builds gradually. In the first years of a policy, there may be little or no cash value available to borrow. The amount you can borrow is set by your policy, usually up to a percentage of your cash surrender value. Policies designed with paid-up additions can build cash value faster than a standard design, which is why policy design matters if access to cash is part of your plan.
How to borrow against your life insurance
- Check your available loan value. Your annual statement, the insurer’s online portal, or your agent can tell you how much you can borrow.
- Ask about the loan interest rate. Find out whether it’s fixed or variable and how loans affect dividends on your policy.
- Request the loan. Most insurers accept requests online, by form, or through your agent. There’s no credit application.
- Receive the funds. Funds are often sent within days, by check or direct deposit.
- Set your repayment plan before you spend the money. This is the step most people skip, and it’s the one that protects your family.
When should you pay it back?
You’re not required to repay on a schedule, but we recommend treating every policy loan like a loan you intend to pay off, because:
- Repaying restores your death benefit and keeps the loan from growing.
- Repaying rebuilds your access, so the same cash value is ready for the next need or opportunity.
- Unpaid interest compounds against you. If the loan and interest grow larger than the cash value, the policy can lapse.
A simple rule we teach: before you borrow, decide the monthly amount you’ll pay back and for how long. If you were already making a car or credit card payment, redirecting that same payment to your policy loan is a practical way to repay it.
Policy loan vs. withdrawal vs. surrender
| Policy loan | Withdrawal (partial surrender) | Full surrender | |
|---|---|---|---|
| What happens | Insurer lends you money; cash value is collateral | You take part of the cash value out permanently | You cancel the policy and take the cash surrender value |
| Effect on coverage | Death benefit reduced by any unpaid loan and interest | Death benefit permanently reduced | Coverage ends |
| Repayment | Optional, on your schedule | Not repaid | Not applicable |
| Taxes | Generally not taxable while the policy is in force and not a MEC | Generally not taxable up to what you’ve paid in (your cost basis) | Taxable on gain above your cost basis |
Taxes: what you need to know
- Loans are generally not taxable while the policy stays in force and is not a MEC.
- If a policy lapses or is surrendered with a loan outstanding, the loan can be treated as a distribution, and taxes may be due on any gain, even though you didn’t receive new cash.
- If the policy is a MEC, loans and withdrawals are taxable to the extent of gain and may be subject to a 10% penalty before age 59½.
Talk with your tax advisor before taking a large loan.
The risks, honestly
| Benefit | Risk to manage |
|---|---|
| No credit check or approval process | Easy access can make it easy to overspend |
| No required repayment schedule | Without a plan, interest keeps growing |
| Cash value keeps working while you borrow | Dividends on borrowed amounts may be credited differently |
| Generally not taxable while in force | A lapse with a loan outstanding can trigger taxes |
| Funds for any purpose | Unpaid loans reduce what your family receives |
Where policy loans fit in the Ownership Path
We teach every family to build in order: Protection → Liquidity → Growth → Lifestyle.
- Protection closes the gap, with term, whole life, or both. Your policy’s first job is protecting your family.
- Liquidity builds your reserve, and over time a whole life policy’s cash value can add to it. A policy loan is one way to reach that cash value in an emergency.
- Growth puts your money to work in investments and opportunities, and accessing your cash value through policy loans can add to it.* Families use loans to fund a business, a real estate down payment, or a major purchase, then repay on their own schedule.
- Lifestyle is the options you gain when your money is working for you.
*Investments carry their own risks, and unpaid loans reduce the death benefit.
This is the idea behind strategies like infinite banking: using your own policy’s cash value as a source of financing, then paying yourself back so the same capital is available again. It works when the policy is designed for it, funded consistently, and every loan has a repayment plan.
Is your policy ready to borrow against?
If you don’t have cash value yet, start with the foundation. Our free Cover Your ASSets calculator shows your protection gap and checks whether your cash flow is ready for whole life, term, or a mix.
Frequently asked questions
Can I borrow from a term life insurance policy?
No. Term life insurance has no cash value, so there’s nothing to borrow against. Some term policies can be converted to permanent coverage, which can build cash value over time.
How much can I borrow against my life insurance?
Usually up to a percentage of your cash surrender value, as set by your policy. Your annual statement or your agent can tell you the exact amount.
Do I have to pay back a life insurance loan?
There’s no required schedule, but any unpaid loan and interest is subtracted from the death benefit, and a loan that grows larger than the cash value can cause the policy to lapse. We recommend setting a repayment plan before you borrow.
Does a policy loan affect my credit score?
Policy loans don’t require a credit check and generally aren’t reported to credit bureaus.
Is a policy loan taxable?
Generally not, as long as the policy stays in force and isn’t a MEC. If the policy lapses or is surrendered with a loan outstanding, taxes may be due on any gain.
How quickly can I get the money?
Often within a few business days once the insurer receives your request, depending on the company.
About the author
Carmen Britt is the co-founder of Wealth Nation, which she built with her husband, Darius. Together, Carmen and Darius teach more than 200,000 YouTube subscribers the Ownership Path: Protection, Liquidity, Growth, and Lifestyle. Their own journey started with paying off $140,000 of debt, and Carmen helps families build the habits and lifestyle that lasting wealth makes possible.
This article is for educational purposes only and is not written or intended as specific insurance, tax, legal, or investment advice. Consult your own tax or legal advisor about your situation. All guarantees are subject to the claims-paying ability of the issuing insurance company. Dividends are not guaranteed. Policy loans and partial surrenders reduce cash value and death benefit, accrue interest, increase the chance the policy will lapse, and may have tax consequences; if a policy is a Modified Endowment Contract (MEC), loans and distributions are taxable to the extent of gain and may be subject to a 10% tax penalty before age 59½. Loan rates, loan limits, and how loans affect dividends vary by company and contract and may not be available in all states.
Insurance products are offered through Wealth Nation Insurance Agency, a licensed insurance producer (NPN 21142547; CA License #6013237). Carmen Britt is a licensed insurance producer (NPN 18237202; CA License #4091452). Darius Britt is a licensed insurance producer (NPN 18217158; CA License #0M74493).