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One of the biggest advantages of permanent life insurance is that it can do more than provide a death benefit. As your policy builds cash value, it may also give you access to money during your lifetime through policy loans or withdrawals.
Understanding how these options work is essential before accessing your policy. Borrowing too much or withdrawing funds incorrectly can reduce your death benefit, create unexpected tax consequences, or even cause your policy to lapse.
In this guide, you’ll learn what is a policy loan on life insurance, how policy loans are calculated, when a withdrawal from a life insurance policy makes sense, and what to consider before using your cash value.
A policy loan on life insurance allows you to borrow money using your policy’s cash value as collateral. Instead of applying through a bank, the insurance company lends you money while your policy remains in force. Interest accrues on the outstanding balance, and any unpaid loan plus interest is generally deducted from the death benefit if it isn’t repaid.
Yes—but only certain types of life insurance allow you to access cash while you’re alive. Permanent policies such as whole life, universal life, and indexed universal life build cash value that may be available through loans or withdrawals. Term life insurance does not accumulate cash value and cannot typically be accessed this way.
There are several ways to access money from a permanent life insurance policy:
Each option has different tax rules, long-term effects, and planning considerations, making it important to understand which approach best fits your goals.
A policy loan is money borrowed from an insurance company using your policy’s cash value as collateral. Unlike a traditional bank loan, there is typically no credit check, income verification, or repayment schedule because the loan is secured by the value inside your life insurance policy.
This is one of the features that makes whole life insurance attractive for long-term financial planning. As your cash value grows, it may become available for future opportunities or unexpected expenses without requiring you to liquidate other assets.
Here’s what generally happens when you request a loan:
Because your cash value serves as collateral, getting a policy loan is much simpler than qualifying for a traditional loan.
Policy loans are calculated based on your available cash value, the insurance company’s lending limits, and any existing loan balance. Most insurers allow you to borrow only a percentage of your accumulated cash value rather than the full amount.
Several factors determine how much you can borrow:
For example:
| Policy Value | Amount |
| Cash Value | $120,000 |
| Maximum Loan Percentage | 90% |
| Maximum Available Loan | 108000 |
| Existing Loan Balance | 18000 |
| Available to Borrow | 90000 |
Every insurance company has its own loan provisions, so the exact amount available will vary by policy.
Not every life insurance policy builds cash value. Only permanent policies generally allow policy loans.
If you’re wondering about insurance policies you can borrow from, here’s a quick comparison.
| Type of Policy | Can You Borrow? |
| Whole Life Insurance | ✅ Yes |
| Universal Life Insurance | ✅ Yes |
| Indexed Universal Life (IUL) | ✅ Yes |
| Variable Universal Life | ✅ Usually |
| Term Life Insurance | ❌ No |
Term life insurance provides only a death benefit for a specific period of time. Since it doesn’t build cash value, there is nothing available to borrow against.
Permanent life insurance accumulates cash value over many years, creating the opportunity to access funds through loans or withdrawals.
A loan on a whole life policy is often considered the most predictable type of life insurance loan because whole life policies are designed to build guaranteed cash value over time.
Whole life insurance offers several advantages when borrowing:
Many people use a loan on a whole life policy to help finance:
While these loans can be flexible, they are not “free money.” Interest continues to accrue until the loan is repaid or deducted from the death benefit.
For those practicing the Infinite Banking Concept, policy loans are often used as part of a larger financial strategy. However, even in that context, understanding how loans affect long-term policy performance is essential.
The interest rate on a life insurance loan depends on the insurance company and the terms of your specific policy. Some policies use a fixed loan rate, while others use a variable rate that changes over time.
You may also hear the terms direct recognition and non-direct recognition when discussing policy loans.
Generally speaking:
Because loan interest affects the long-term performance of your policy, it’s important to understand your contract before borrowing.
The interest you pay on a life insurance loan goes to the insurance company because it is lending money from its general account—not directly from your cash value.
This is one of the most misunderstood aspects of policy loans.
Although your cash value secures the loan, the insurance company advances funds from its own assets. Your cash value remains inside the policy as collateral while the insurer charges interest on the amount you’ve borrowed.
This allows your cash value to continue earning guaranteed growth (for whole life insurance policies) even while a loan is outstanding.
Understanding this distinction can help you make more informed decisions about borrowing and avoid common misconceptions about how policy loans work.
A withdrawal from a life insurance policy permanently removes part of your cash value. Unlike a policy loan, a withdrawal cannot be repaid. However, because the money leaves the policy, it reduces both your cash value and your death benefit.
Whether a withdrawal is the right choice depends on your financial goals and the design of your policy.
People commonly take withdrawals to:
Unlike loans, withdrawals permanently reduce the amount of cash remaining inside the policy. That means there is less money available to earn future interest or dividends and less collateral available for future borrowing.
Before requesting a withdrawal from a life insurance policy, it’s worth reviewing an updated policy illustration to understand the long-term impact.
The biggest difference is that a loan is borrowed money, while a withdrawal permanently removes money from your policy.
Although both allow you to access your policy’s cash value, they work very differently.
| Feature | Policy Loan | Withdrawal |
| Requires repayment | Optional | No |
| Interest charged | Yes | No |
| Reduces cash value | Cash value serves as collateral | Yes |
| May reduce death benefit | Yes, if unpaid | Yes |
| Can affect policy performance | Yes | Yes |
| Potential tax consequences | Generally not if policy stays in force | Possible if withdrawal exceeds basis |
Many policy owners prefer loans because they preserve flexibility. If circumstances change, the loan can be repaid, allowing more of the policy’s value to remain intact.
A withdrawal is permanent. Once funds are removed, they cannot simply be “put back” without making new premium payments, and those payments remain subject to policy limits and underwriting rules.
In most cases, policy loans are not considered taxable income because you are borrowing money rather than receiving taxable earnings.
This favorable tax treatment is one reason policy loans are frequently discussed as part of long-term financial planning.
However, there are important exceptions.
A policy loan may create tax consequences if:
Tax laws surrounding life insurance can be complex, so it’s important to work with a qualified tax professional before making significant policy changes.
Withdrawals may or may not be taxable, depending on how much money has been paid into the policy and how much is being withdrawn.
Generally speaking:
Because every policy is different, reviewing the tax implications before taking a withdrawal can help avoid unexpected surprises.
A policy loan can be an effective financial tool when used strategically and with a clear repayment plan.
Situations where borrowing may make sense include:
Some policy owners borrow to purchase income-producing assets such as rental real estate or business equipment.
Business owners may use policy loans to improve cash flow, hire employees, purchase inventory, or fund expansion.
Instead of selling investments during a market downturn, some people use policy loans to bridge temporary cash needs.
Emergency Expenses
Medical bills, home repairs, or other unexpected expenses may justify using available policy cash value when other financing options are less attractive.
Many individuals intentionally use policy loans as part of a broader cash flow strategy. The success of this approach depends on policy design, disciplined repayment, and long-term planning—not simply borrowing money whenever cash is needed.
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There are situations where a withdrawal may be more appropriate than a loan.
Examples include:
Because every withdrawal permanently changes the policy, it should be evaluated carefully before proceeding.
Many of the problems associated with life insurance loans aren’t caused by the loan itself—they’re caused by poor planning.
Some of the most common mistakes include:
Even though there are often no required monthly payments, interest continues to accrue. Over time, unpaid interest can significantly increase the loan balance.
Policy performance changes over time. An annual review helps ensure your loan strategy remains sustainable.
One of the most expensive mistakes is allowing a heavily borrowed policy to lapse, potentially triggering an unexpected tax bill while eliminating your life insurance coverage.
A policy loan should support a financial objective—not simply fund discretionary spending without a repayment strategy.
You are not required to repay a life insurance policy loan on a set schedule. However, that doesn’t mean the loan goes away. Interest continues to accrue, increasing the outstanding balance over time.
If the loan remains unpaid, one of two things typically happens:
This is why many policy owners periodically review their policy and loan balance with their advisor. Even if you don’t intend to repay the loan immediately, monitoring its impact helps ensure your policy continues performing as intended.
A policy loan allows you to borrow money from your insurance company using your policy’s cash value as collateral. The loan accrues interest, but there is no required repayment schedule. Any unpaid balance is typically deducted from the death benefit if it isn’t repaid.
Yes—but only if you own a permanent life insurance policy that has accumulated cash value. Depending on your policy, you may be able to access funds through a policy loan, a withdrawal, dividends, or by surrendering the policy. Term life insurance does not build cash value and cannot be accessed this way.
You can typically borrow from permanent life insurance policies that accumulate cash value, including:
Term life insurance does not build cash value and therefore does not offer policy loans.
Policy loans are based on several factors, including:
Most insurers allow borrowing up to a percentage of your available cash value rather than the entire amount.
The interest rate varies by insurance company and policy. Some policies have fixed loan rates, while others use variable rates. Your policy contract explains how interest is calculated and whether your policy uses direct recognition or non-direct recognition.
The interest is paid to the insurance company because it is advancing funds from its general account. Depending on your policy design, your cash value may continue earning guaranteed interest or dividends while the loan is outstanding, although the treatment differs among policies.
In most cases, no. Policy loans are generally not taxable because they are borrowed funds rather than taxable income. However, if the policy lapses or is surrendered with an outstanding loan, taxes may become due.
Withdrawals are often tax-free up to your cost basis. Amounts withdrawn above your basis—or withdrawals from a Modified Endowment Contract (MEC)—may be taxable.
Most life insurance policy loans do not require scheduled monthly payments.
However, interest continues to accrue, so many policy owners choose to make voluntary payments to keep the loan from growing too large. In many cases these payments can be configured as automatic monthly payments.
Yes. Any outstanding loan balance, along with accrued interest, will be deducted from the death benefit if it remains unpaid at the insured’s death.
Yes. If the outstanding loan and accrued interest become larger than the policy’s available cash value, the policy may lapse. This can result in the loss of life insurance coverage and potentially create taxable income.
It depends on your goals.
A policy loan offers flexibility because it can be repaid, while a withdrawal permanently removes cash value from the policy. The right choice depends on your financial objectives, tax situation, and long-term plans.
A cash value life insurance policy can be much more than a death benefit. Used wisely, it can provide financial flexibility through policy loans and withdrawals while continuing to protect the people you care about.
The key is understanding how policy loans are calculated, the interest rate on a life insurance loan, and the long-term impact of borrowing before accessing your policy’s cash value. A well-managed policy loan can be a valuable financial tool, while an unmanaged loan can reduce your death benefit or even put the policy at risk of lapsing.
Before taking a loan or withdrawal, consider how the decision fits into your overall financial plan. A few minutes of planning today can help preserve the long-term value of your policy for years to come.
Ready to Explore Your Options?
Every life insurance policy is different. The amount you can borrow, how interest is charged, and the long-term impact on your policy all depend on the type of policy you own and how it’s been designed.
At McFie Insurance, we sell life insurance policies and help our clients understand them. If you’re considering a policy loan, planning a withdrawal, or simply want to know how your cash value works, we’re happy to review your policy, explain your options, and answer your questions so you can make an informed decision.
by Gracine McFie
There are many ways to access information about finances, but it can be hard to determine which sources are trustworthy. I like to put information together in an accurate, straightforward, easy to understand manner so people can make good financial decisions based on the information provided without having to waste time wondering if the source is reliable.