Can You Borrow Against Your Life Insurance Policy? A Complete Guide

When you’re in need of quick cash, your life insurance policy might be more valuable than you realize. If you hold a permanent life insurance plan with cash value accumulation, borrowing against it could be an option worth exploring. But before you make this financial move, let’s break down exactly how this works, what conditions must be met, and whether it’s the right choice for your situation.

Understanding When Borrowing Is Possible

The critical question—can you borrow against your life insurance policy—has a straightforward answer: it depends on your policy type. Not all life insurance products offer this flexibility.

Only Permanent Policies Qualify

Your ability to borrow is restricted to permanent life insurance. This category includes whole life insurance, universal life insurance, and certain variable life insurance products. These policies come with a built-in cash value component that grows over time as you pay your premiums.

Term life insurance, by contrast, offers no borrowing option. These affordable, limited-duration policies are designed purely as death benefit payouts and lack the cash accumulation feature that serves as collateral for loans.

Cash Value Is Essential

The foundation for borrowing against life insurance is the presence of cash value in your account. This represents the portion of your premium payments that exceeds the cost of maintaining your death benefit. Think of it as a savings component embedded within your policy.

Different permanent policies handle cash value differently. Some policies direct this accumulated value toward enhancing your death benefits, while others use it to reduce or eliminate premium payments as you age. Regardless of the specific arrangement, you can only borrow if your policy has both the cash value feature and actual funds sitting in that account.

The Mechanics of Borrowing

If you’re wondering how to actually borrow against your life insurance policy, the process is surprisingly straightforward compared to traditional lending.

How the Process Works

Contact your insurance provider through their designated application process. Unlike conventional loans, you won’t encounter credit checks or stringent approval procedures. Since your policy’s cash value serves as direct collateral, the insurer’s risk is minimal.

You typically have access to borrow up to 80–90% of your policy’s current cash value, though some insurers may allow borrowing against the full amount. The beauty of this approach is that you’re essentially borrowing from yourself—accessing funds you’ve already accumulated through your policy payments.

What Happens If You Don’t Repay

Should you fail to make loan payments or allow your policy to lapse, the insurance company will automatically deduct the outstanding balance from your cash value account. Any remaining debt becomes your direct responsibility. If you pass away while still owing money and the cash account can’t cover it, the insurance company claims the difference from your policy’s death benefit payout to your beneficiaries.

Weighing the Advantages and Drawbacks

Why Borrowers Choose This Option

The primary appeal is access to quick liquidity without extensive approval processes. Interest rates on life insurance loans tend to be competitive. You avoid providing additional collateral beyond your existing policy. Funds can be accessed relatively quickly compared to other personal lending options.

The Significant Downside

Borrowing reduces your policy’s effective value until repayment occurs. The insurance company maintains a claim against your cash value for the borrowed amount plus accumulated interest. This directly impacts the death benefit your beneficiaries will eventually receive. If you borrow heavily and fail to repay, your coverage effectively diminishes.

Making the Right Decision

Borrowing against your life insurance policy can serve legitimate short-term capital needs, but it shouldn’t become a regular funding source. Avoid using these loans for investment purposes or speculative ventures.

Before proceeding, honestly assess whether you can realistically repay the loan and whether reducing your policy’s value aligns with your family’s long-term financial protection goals. The decision to borrow against life insurance should strengthen your overall financial position, not compromise it.