Many people assume every life insurance policy works like a savings account. Then they call their insurer, ask for money, and learn their policy has nothing to borrow against. Others borrow successfully, stop paying attention, and let the policy lapse. That can leave them with a tax bill on money they already spent.
So you can borrow a cash value life insurance? Yes, but only if your policy builds cash value. This guide will explain which policies qualify how soon you get borrowed, how much you can take it and what can cost you.
Quick Answer
You can borrow a guest life insurance if you own a permanent policy with cash value, such as whole life, universal life, universal whole life or variable life insurance plans. Term life insurance has no cash value so it does not offer you policy loans. The insurance company lend you its own money and uses your cash value as collateral. Any unpaid loan and interest is subtracted from a death benefit when you die.
Can You Borrow Against Life Insurance? The Direct Answer
Yes, if the policy has cash value. A policy loan is a loan that is come from the insurance company and you accumulated cash value serves as collateral. The NAIC life insurance buyers guide says that you may borrow against the policy cash value by taking a policy loan. It also wants that unpaid loans and interest will subtracted from your benefits.
Knowledge gaps are common here. In the 2026 Insurance Barometer Study, 37% of Americans described themselves as only somewhat knowledgeable or not knowledgeable at all about life insurance. The same study found that 52% of American adults own life insurance. Many of those owners may hold a policy without ever checking whether it has cash value.
What Life Insurance Can You Borrow From?
Only cash value policies have a loan feature. The NAIC explains that whole life, universal life, and variable life are the types of cash value policies. Each one pairs a death benefit with a savings component that grows as you pay premiums.
Not every insurer sets the same rules, so check your own contract. The table below shows how common policy types compare.
| Policy type | Builds cash value? | Policy loan available? | What to check |
| Term life | Generally no | Generally no | Whether a conversion option exists |
| Whole life | Yes | Yes, once cash value builds | Loan interest rate and loan limit |
| Universal life | Yes | Yes, depending on funding | Whether the cash value covers monthly costs |
| Indexed universal life | Yes | Yes, depending on the contract | How the loan interacts with index crediting |
| Variable life | Yes, tied to investments | Yes, depending on the contract | Cash value can fall with the market |
| Final expense insurance | Depends on the contract | Depends on the contract | Small cash value may limit what you can borrow |
Insurers also differ in financial strength. Rating agencies such as AM Best publish financial strength ratings for insurance companies. This can help you judge an insurer before you commit to a long-term policy, though it does not change your loan terms.
Can You Borrow Against Term Life Insurance?
Generally no. term life insurance covers you for the set type. And it can be 10 or 20 years and it also pays the death benefit to your beneficiaries if you die during that time. The NAIC states that most of the term life insurance policies have cash value which means that there is nothing to use as collateral.
Term holders do have one possible path. The NAIC Buyer’s Guide says you may be able to trade many term policies for a cash value policy during a conversion period, even if you are not in good health. A converted policy would then start building cash value, but conversion usually means higher premiums, and the cash value takes time to grow.
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How Soon Can I Borrow From My Life Insurance Policy, and How Much?
You can borrow once the policy has built enough cash value, which can take years. MassMutual notes that in the early policy years, cash value is generally limited, and there may be little or no cash value available for policy loans. A new policy rarely lets you borrow meaningful money in the first year.
So when people search for life insurance policies you can borrow from immediately, the honest answer is that the cash value must exist first. A policy can have cash available sooner if you fund it heavily, but heavy early funding can push it into MEC status, which changes the tax rules. Your insurer can tell you your exact loan availability for your contract.
How much can I borrow from my life insurance policy?
The limit is tied to your cash value, and the insurance company set their own caps. One industry overview explains that an owner can generally borrow up to the cash value minus any outstanding debt, such as earlier loans and interest owed. Some insurers set a lower percentage. For example, PRCUA states that a loan may not exceed 90% of the cash value on its certificates, while AAFMAA states that owners can borrow up to 75% of the cash value on its Value-Added Whole Life policies. These are individual company rules, not industry standards.
What does a loan cost?
Policy loans charge interest, just like other loans. AAFMAA shows one structure, a variable rate set 1 percentage point above the policy’s crediting rate. Your insurer’s rate and method may differ, so read the loan provisions in your contract.
You also usually do not have to follow a repayment schedule. That flexibility is the appeal, but it is also the risk. Unpaid interest adds to the balance, and a growing balance can eventually exceed the cash value.
How to Borrow Against Life Insurance, Step by Step
The process is usually simple because the insurance company is lending against its own collateral. Here is how to borrow from life insurance in the practical terms.
- Confirm your policy type. Read the contract or log in to your insurer’s portal to see whether it has cash value.
- Request an in-force illustration. This will show that your cash surrender value, current loan balance, and available borrowing amount.
- Check the loan terms. Look at the interest rate, whether it is fixed or variable, and how interest is charged.
- Confirm MEC status. Ask whether your policy is a modified endowment contract, because that changes the tax outcome.
- Submit the loan request. Most of the insurance companies use a loan request form, and some allow it online or by phone.
- Plan your repayment. Decide if you will repay in full, pay interest only, or you will let the balance run, and understand the effect on your death benefit.
Is a Life Insurance Loan Taxable? Risks Every Borrower Should Know
A policy loan is generally not tax while the policy stays in force but the rules can change into situations. According to ThinkAdvisor’s summary of the tax rules, a loan from a policy that is not modified endowment contract under IRC section 7702A is not treated as a distribution and IRC section 72 so it is not included in income. A loan from MEC is treated as the distribution as it is included in income to that extent the cash value exceeds your investment in the contract.
The table below summarizes how common situations are treated.
| Situation | General tax result | Death benefit effect |
| Loan from a non-MEC policy, policy stays in force | Not treated as taxable income | Unpaid loan and interest reduce the payout |
| Loan from a MEC | Taxable to the extent cash value exceeds your investment in the contract | Unpaid loan and interest reduce the payout |
| Policy lapses or is surrendered with a loan outstanding | Loan balance becomes taxable to the extent cash value exceeds your basis | Coverage ends, so no death benefit is paid |
| Loan unpaid at death | Not a taxable event for the borrower | Balance is subtracted from the benefit paid |
Other risks to weigh
- Smaller payout for beneficiaries. The unpaid balance comes off the death benefit.
- Slower cash value growth. Depending on the contract, borrowed amounts may earn less than the rest of the cash value.
- Rising interest costs. A variable loan rate can change over time.
Smarter Alternatives and When a Policy Loan Makes Sense
A policy loan works best for the short term needs when you can repay it, and when you want to keep your coverage in active. It can be a poor fit if you cannot afford the interest, if you are close to lapsing, or if your beneficiaries rely on every dollar of the death benefit.
Withdrawals follow a different tax order. Henssler Financial explain that for non MEC policies, withdrawals are generally treated as coming first from your premiums and then from gains. Your agent can run the number for your specific policy.
A Helpful Next Step
You do not have to decide today. If you are thinking about borrowing against your policy and also thinking about how life insurance could help your family cover the final expenses then Pay For Funeral offers the easy resources to help you to compare your options at your own pace. There is no pressure and call to your insurance company or a licensed agent is a good first move either way.
Plan Ahead and Secure Your Family's Financial Relief Today
Prevent your loved ones from facing sudden out-of-pocket burial expenses or struggling with policy loan balances. Visit Pay For Funerals today to explore plain-language, hassle-free plans tailored to your age and budget.
Rachel Smith, Funeral Insurance Specialist
Rachel Smith is a dedicated funeral insurance expert at Pay For Funeral, with over 10 years of experience helping families find peace of mind during life’s most sensitive moments. Known for her warm, compassionate approach, Rachel empowers individuals to plan with clarity, dignity, and confidence. She specializes in simplifying funeral insurance, making it approachable, affordable, and tailored to each person’s unique needs. Through every article she writes, Rachel strives to educate, comfort, and guide readers in making thoughtful, informed choices for the future.
