What Is a Policy Loan?

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A policy loan is a loan you can take out against your life insurance policy. The cash value of your policy typically limits the amount you can withdraw.

Key Takeaways

  • A policy loan allows you to borrow money using your life insurance policy’s cash value as collateral.
  • You can use this money for anything. There aren’t any restrictions.
  • There isn’t a set repayment schedule, and you aren’t required to pay back this loan before you die.
  • Any balance left when you pass away is subtracted from your policy’s death benefit before your beneficiaries receive it.

How a Policy Loan Works

Like other loans, you need to pay back a policy loan with interest. If you don't repay the amount you owe before passing away, the insurance company will deduct any remaining balance and interest from the death benefit your beneficiaries receive.

With a permanent life insurance policy, you earn cash value over time. Cash value is the portion of your premium that the insurance company invests over time. You can typically access this cash value through policy loans and withdrawals.


Life insurance companies can set limits on policy loans. Some may require you to have a certain amount of cash value built up before you can borrow. Always check the terms of your insurance contract.

Since your cash value is used as collateral, the interest rate on a policy loan may be lower than what you'd find with a personal loan or credit card. Some states limit how much the insurer can charge in interest. For instance, Washington state has an 8% annual limit; in Florida, the annual rate can be no higher than 10%.


Policy loans don't always have a lower annual interest rate. Always check the rates and compare them to other types of loans before taking out a policy loan.

If you decide to take out a policy loan, the insurance company will give you the cash you need. In exchange, you'll agree to repay the loan plus interest.

Unlike traditional loans, you won’t have a set repayment schedule with a policy loan. You can choose to repay the loan as quickly or slowly as you like. Remember that the longer it takes to repay the loan, the more interest you'll owe.

Example of Taking Out a Policy Loan

Let's say you have a life insurance policy with a $200,000 death benefit and a $35,000 current cash value. You take out a policy loan of $21,000 at 7.5% interest to help pay for your child’s college education.

However, you unexpectedly pass away three years later, before making any loan payments. Since interest accrues on policy loans, the outstanding loan balance would have grown to $26,088 since it originated. That's the original $21,000 plus $5,088 in interest.

The insurance company would deduct that amount from your beneficiaries’ $200,000 death benefit. So instead of getting $200,000, they would only get $173,912.

Pros and Cons of Taking Out a Life Insurance Loan

  • No credit checks

  • Repay on your schedule

  • Spend the money however you’d like

  • Could cause your policy to lapse

  • Can have severe tax implications

  • May reduce your death benefit

Pros Explained

  • No credit check: Since the insurance company uses your cash value as collateral, a policy loan doesn't require a credit check. That could be beneficial if you have bad credit or are worried about the impact of a hard inquiry on your credit score.
  • Repay on your schedule: Most policy loans don't have a set repayment schedule where you must pay equal monthly installments. Instead, you can repay the loan in a way that works for you. You can also choose not to pay it off and just let it get taken out of your death benefit when you pass away. This flexibility can help if you have a tight budget.
  • Spend the money however you’d like: Policy loans don’t restrict how you can spend the money you borrow. You can use it for anything, whether it's to cover an emergency expense or pay for a large purchase.

Cons Explained

  • Could cause your policy to lapse: If you don’t repay a policy loan, it continues to accrue interest. Over time, the balance increases and can get much higher than you thought. Your policy could lapse if you don't have enough cash value to cover the loan balance and interest. That would leave you without life insurance coverage.
  • Can have severe tax implications: If your policy lapses or you surrender or cancel it before paying back your loan, the IRS might consider the money you borrowed to be income if it is more than you paid in premiums. This can leave you with an unexpected tax bill.
  • May reduce your death benefit: Any outstanding balance is taken from your death benefit when you pass away. A reduced benefit means your beneficiaries won’t get all the money you’d planned to give them.

Frequently Asked Questions (FAQs)

Can you take out a loan against your life insurance policy?

Yes. You’re allowed to borrow money from your permanent life insurance policy, using the cash value as collateral. Policy loans can carry more favorable terms than personal loans or credit cards. Different insurance policies carry different time and amount limits then policy loans, however.

Do policy loans require a credit check?

No. Because you are using the cash value of the life insurance policy as collateral, taking out a policy loan does not require a credit check.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Wisconsin Office of the Commissioner of Insurance. "State Life Insurance Fund Glossary of Terms."

  2. Progressive. “Pros and Cons of Life Insurance Loans.”

  3. Florida Legislature. “The 2021 Florida Statutes.”

  4. Washington State Legislature. "Policy Loan Interest Rates."

  5. Northwestern Mutual. “What To Know About Borrowing Against Life Insurance With a Life Insurance Loan.”

  6. Experian. “Can I Withdraw Money From My Life Insurance Policy?

  7. Legal Information Institute. “26 U.S. Code § 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts.”

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