How a policy loan works
- The insurer lends you money using your cash value as collateral.
- You choose whether and when to repay, within the policy's rules.
- Interest is charged, and unpaid interest is usually added to the loan.
- Any balance owed at death is subtracted from the death benefit.
A hypothetical example
Hypothetical policy. Example numbers only.
| Death benefit | $300,000 |
| Cash value | $25,000 |
| Policy loan taken | $10,000 |
| Example benefit if not repaid | $290,000 minus loan interest |
Watch the risks
If the loan and interest grow larger than the cash value, the policy can lapse, and that may create a tax bill on gains. Loans and withdrawals from some heavily funded policies can also be taxed differently. Talk with a tax professional about your situation.
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Common follow-up questions
Can I borrow from term life?
No. Term life has no cash value.
How soon can I borrow?
Once there's enough cash value, which usually takes years of premiums.
Is a policy loan taxable?
Policy loans are generally not taxed while the policy stays in force, but a lapse with a loan can trigger taxes. Ask a tax professional.
Do I have to pay it back?
Not on a set schedule, but unpaid loans and interest reduce the benefit and can lead to a lapse.
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