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Can you borrow against a life insurance policy?
By Mickie Byrd, licensed Texas life insurance agent (NPN 22277248) · last reviewed 2026-07-13
Some life insurance policies let you borrow against them. Only a policy that builds cash value can. Cash value is money that builds up inside the policy over the years, and whole life policies build it. Term policies do not, so there is nothing to borrow against. The policy's own paperwork says which kind you have.
The loan comes from the insurance company. There is no bank and no credit check, because the policy's own cash value stands behind the loan. The loan can only be as large as the cash value the policy has built so far. Asking is usually a short form, not a bank application. That ease is why people reach for it in a tight month.
It is still a real loan, and the company charges interest on it. The policy says what the rate is, or how the company sets it. The interest keeps adding for as long as the loan is unpaid.
Most policy loans have no set payment schedule. You can pay a little, pay it all, or pay nothing for years. That freedom is the part that catches people. A loan nobody has to pay is easy to let grow.
Here is what an unpaid loan does. When the insured person dies, the company subtracts the loan and its interest from the payout. The family receives what is left. A policy bought to leave a certain amount can end up leaving less.
A loan can also grow too large for the policy to carry. If the loan and its interest grow past the cash value, the policy can end, and the coverage ends with it. A policy that ends this way can also raise a tax question, and a tax professional can say what applies.
Even so, people borrow against policies for real reasons: a roof, a medical bill, a hard season. The trade is plain: money in hand now, a smaller payout later. Some people pay the loan back and restore the full amount; others accept the smaller payout. The policy allows either.
Sometimes a family learns about a loan only after a death, when the payout arrives smaller than expected. A note kept with the policy papers, saying a loan exists, spares the family that surprise. And if the surprise comes anyway, the company can show how the amount was figured.
Anyone with a policy loan can ask the company where it stands. Ask for the payoff amount, the interest so far, and what the policy would pay today. The company can answer all three. Most companies also send a yearly statement that carries the same answers. Knowing where the loan stands costs nothing.
Common questions
- Can I borrow against a term life insurance policy?
- No. Term policies usually do not build cash value, so there is nothing to borrow against. Policy loans come from policies that build cash value, the way whole life policies do.
- Do I have to pay a policy loan back?
- Usually there is no set schedule, so the choice is yours. But an unpaid loan and its interest are subtracted from the payout, and a loan that grows past the cash value can end the policy.
- Does a policy loan lower what my family receives?
- Yes, if it is unpaid when the insured person dies. The company subtracts the loan and its interest from the payout, and the family receives what is left.
- Will the company check my credit for a policy loan?
- No. The policy's own cash value stands behind the loan, so there is no bank and no credit check. The request is usually a short form sent to the insurance company. The loan is still real, though: if it goes unpaid, the loan and its interest are subtracted from the payout.
Getting your own affairs in order is free at The Legacy Kit™. A licensed person answers at 844-BYRD-FIN, and no one calls unless you ask.