How Much Can You Borrow From a Life Insurance Policy?

There is no single percentage of a death benefit that everyone can borrow. A policy loan depends on the policy's available cash value, existing loans, and the insurer's contract rules. Term life policies generally do not build cash value, so they usually do not offer policy loans. The NAIC distinguishes term from cash-value coverage and warns that an unpaid loan plus interest reduces the benefit paid at death.

Ask the insurer for today's available loan amount

Find your latest statement and ask for the current cash value, cash surrender value, existing loan balance, loan interest rate, maximum available loan, and any restrictions. Early in a policy, cash value can be much lower than the premiums paid. Do not use the policy's face amount as a loan estimate. The Washington insurance commissioner's guide explains that loans are taken against cash value and outstanding balances reduce the death benefit.

What happens if you do not repay it?

Interest continues to accrue according to the contract, and unpaid interest may be added to the balance. If the insured person dies while a loan is outstanding, the insurer typically subtracts the balance and interest from the death benefit. If the balance grows too large relative to cash value, the policy may lapse, ending coverage. Ask the insurer for an in-force illustration showing the projected benefit and lapse risk with the proposed loan and realistic future premiums.

Check tax treatment before borrowing

A loan from a qualifying policy is often not taxable when taken, but that is not a blanket tax-free promise. A lapse, surrender, or modified endowment contract can change the result. The Washington insurance commissioner notes possible tax bills from cash-value policies. Confirm the policy's classification and basis with the insurer and a tax professional before relying on a loan for spending or retirement income.

Compare the loan's rate, the benefit you would give up, and the risk to coverage with other ways of meeting the need. Our universal-life guide covers the additional monitoring required when a policy relies on cash value to stay in force.