How to Request a Loan From Your Life Insurance Policy

Written by Hannah McCullough Insurance Researcher & Writer

A policy loan is not a new life insurance application. It is a transaction under an existing cash-value policy. The insurer advances money against the policy’s value and charges interest under the contract. Before you request one, check how much is available, what the loan will cost, and what happens if the balance remains unpaid.

If you are deciding whether to keep existing coverage or explore another option, you can see your estimated rate in minutes. The estimate is not a promise of approval and does not replace a review of your current policy.

What is a life insurance policy loan?

A life insurance policy loan lets the owner of an eligible cash-value policy borrow against the policy’s value. The policy remains in force while the loan is outstanding, subject to the contract’s premium, interest, and lapse requirements. The loan is secured by the policy, so it is not the same as withdrawing cash or surrendering the policy. It also differs from assigning a policy as loan collateral, where a lender receives a security interest in the policy rather than the owner borrowing from the insurer.

The words in the contract matter. “Cash value,” “cash surrender value,” and “loan value” can describe different figures. The amount you can request may be lower than the cash value shown on a statement after the insurer accounts for an existing loan, accrued interest, surrender charges, or other provisions. For related definitions, the life insurance policy language help guide can make the policy’s terminology easier to check.

Which policies may allow a loan?

Cash-value policies may allow borrowing against the policy, while a standard term policy generally does not build cash value to borrow against. The National Association of Insurance Commissioners (NAIC) describes term and cash-value coverage as different policy classes and notes that cash-value policies can let owners access money while they are alive. Read the specific contract because product features and loan provisions vary.

Whole life and universal life are common cash-value policy types. Variable and indexed products can have additional investment and contract features that affect the value shown in an illustration or statement. A policy name alone does not tell you the amount available for a loan. Look for the policy loan provision, current loan value, interest rate, and any warning about lapse. If the contract is whole life, whole life policy borrowing follows those same provisions from the initial request to the insurer onward.

If you have term coverage, check whether the contract includes a conversion option. Conversion may let you move to permanent coverage under specified rules, but it does not mean you can borrow from the existing term policy today. Do not cancel current coverage while investigating another policy.

How do you request a policy loan?

Start with the insurer or its policy-service department. Ask for the current loan value, the loan interest rate, the interest-crediting method if the contract has one, and a projection showing the effect of the loan on cash value and death benefit. Request the paperwork and read the instructions before signing. When requesting a loan from your policy, approval usually rests on the contract and available loan value rather than a credit check.

1. Confirm that you are the policy owner or otherwise authorized to request the transaction.
2. Ask for the amount available after existing loans, accrued interest, and contract charges.
3. Review the loan rate, when interest is charged, and whether the contract requires payments or permits interest to accumulate.
4. Ask how a missed premium or growing loan balance could affect the policy’s ability to stay in force.
5. Keep the signed request, the insurer’s confirmation, and an updated loan statement with your policy records.

Do not use an online account balance as the only decision document. Ask the insurer for a current in-force illustration or equivalent projection when one is available. That document can show how different repayment choices affect the policy, although it remains an estimate based on stated assumptions.

What does a policy loan cost?

The cost is the interest specified in the policy contract. The contract should state the rate, whether it can change, when interest is added, and how the insurer handles unpaid interest. Do not assume that the rate is lower than another form of borrowing or that the policy’s cash value will grow faster than the loan balance.

Ask whether the policy uses a direct-recognition or non-direct-recognition approach if that term appears in the contract or illustration. The practical effect depends on the product and the insurer. A licensed professional who can review the actual policy can explain the projection without treating an assumed illustration as a guarantee.

For a simple illustration, a $10,000 balance at a stated 6% annual rate would accrue about $600 in first-year interest before any payments or contract-specific calculations. That is only arithmetic, not a prediction of your policy’s rate or balance. Use the insurer’s figures for a real decision.

What happens to the death benefit?

An unpaid policy loan generally reduces the amount available to beneficiaries under the policy’s terms. The reduction can include the outstanding principal and unpaid interest. The exact calculation depends on the contract, so ask the insurer to show both the current death benefit and the projected benefit with the loan outstanding.

FINRA warns that borrowing from an existing life insurance policy can reduce the death benefit and may make it harder to keep the original policy in force without additional premium payments. That warning matters even when the loan request feels routine. A balance that grows quietly can leave less protection for the people who depend on the policy.

Can a policy loan create a tax problem?

A policy loan is not automatically taxable simply because you receive the money, but the answer depends on the contract and the policy’s tax status. A lapse or surrender can change the result. The IRS says that surrender proceeds above the policy’s cost can be included in income, and its explanation of cost accounts for unrepaid loans in the calculation.

FINRA also identifies potential tax consequences when an existing policy with an outstanding loan is surrendered or replaced. Do not assume the transaction has no tax consequences. Before a large loan, surrender, replacement, or premium change, ask a tax professional to review your basis, loan balance, and proposed transaction.

The IRS rules cited here are federal rules. State tax treatment and the terms of a particular contract can add other considerations. This article cannot calculate your tax result.

How should you weigh the risks?

The right question is not only whether the insurer will send the money. It is whether the policy can continue supporting the coverage you bought. Compare the requested amount with the death benefit, the cash value, the loan rate, and your ability to pay interest or premiums.

• Coverage risk: an unpaid balance can leave beneficiaries with a smaller payment.
• Lapse risk: a growing balance can weaken the policy’s position and may contribute to lapse under the contract.
• Tax risk: surrender or lapse can create a taxable amount, depending on the policy and your basis.
• Replacement risk: replacing coverage can introduce new costs, underwriting, surrender charges, or a new contestability period.

Do not cancel an existing policy to fund a different policy until the new coverage is issued and you have compared the contracts. A lower new premium does not by itself prove that replacement is better for your household.

What should you ask before signing?

Ask for written answers to the questions below, using the numbers from your policy rather than a generic illustration:

• What is the current loan value after existing balances and charges?
• What interest rate applies, and can it change?
• When is interest added, and what happens if it is not paid?
• How would the loan change the death benefit today and under future projections?
• What premium or loan balance would place the policy at risk of lapse?
• Would a withdrawal, surrender, replacement, or modified premium create a different tax result?

Keep the answers with your policy records and review the balance at least as often as you review the policy. If the insurer’s projection shows a possible lapse, stop and obtain professional advice before requesting more money.

Is a policy loan right for you?

A policy loan may fit a short-term need when the owner understands the contract, accepts the effect on coverage, and has a credible plan for interest and premiums. It is a poor fit when the policy is the household’s only meaningful life insurance protection or when the owner cannot monitor a growing balance. When the alternative is taking cash out instead, comparing a withdrawal and a policy loan against the same coverage need can clarify the choice.

Review the policy with the insurer and, when appropriate, a licensed life insurance agent and tax professional. Ask for current figures rather than relying on a general rule. A professional can help explain the contract, but the decision should reflect your budget, beneficiaries, other borrowing choices, and need for ongoing coverage.

If you want to explore what new coverage might cost without treating the result as a guarantee, you can see your estimated rate in minutes. Review that estimate alongside the current policy’s loan projection, and do not replace existing coverage until the consequences are clear.