March 10, 2026 · Brandon Roberts
Should You Borrow Against Your Life Insurance? An Honest Look at When It Makes Sense
You own a cash value life insurance policy. Maybe you've had it for ten years, maybe twenty. The cash value has been growing steadily — and now you're looking at it, wondering whether you should put that money to work.
Perhaps you need to bridge a gap between retiring and starting Social Security. Perhaps you have an unexpected expense and don't want to sell investments at a loss to cover it. Perhaps you've heard that policy loans are one of the major advantages of cash value life insurance, and you want to understand whether that advantage is real or just marketing.
Here's the honest answer: borrowing against your life insurance can be one of the smartest financial moves available to you — or it can quietly damage a policy you've spent years building. The difference depends entirely on the specifics of your situation, your policy's loan provisions, and whether you have a clear plan for how the loan fits into your broader financial picture.
This post walks through both sides. Not to scare you away from using a feature that's genuinely valuable, but to help you understand when a life insurance policy loan is a powerful tool and when it's a decision you might regret.
How Life Insurance Policy Loans Actually Work
Before weighing the pros and cons, it helps to understand the mechanics — because life insurance loans work differently from every other type of loan you've encountered.
When you borrow against your life insurance, you are not withdrawing your cash value. Your cash value stays in the policy, continuing to earn interest or dividends. Instead, the insurance company lends you money and uses your cash value as collateral for that loan. Think of it like a home equity line of credit — except the "home" is your policy, and the lending terms are far more flexible.
A few things make this different from borrowing at a bank:
No credit check, no application, no approval process. Your cash value is the collateral. The insurer doesn't care about your credit score, your income, or your debt-to-income ratio. You request the money, and it typically arrives within a few days to a week. (If you prefer a visual explanation, this short video walks through how borrowing against a policy works.) For a detailed walkthrough of the mechanics, our guide to the life insurance loan process covers each step.
No mandatory repayment schedule. There is no payment booklet, no monthly due date, no amortization schedule. You can repay the loan on whatever timeline works for you — all at once, in irregular amounts, or not at all during your lifetime. The insurance company will not call you asking for a payment.
The loan doesn't appear on your credit report. Because the policy itself secures the loan, it is a private transaction between you and the insurance company. It won't affect your credit score or count toward your debt-to-income ratio if you apply for a mortgage or other financing.
Interest accrues on the loan balance, not on a payment schedule. This is where most people need to pay close attention. Unlike a bank loan where interest is amortized into your monthly payment, life insurance loan interest simply adds to the outstanding balance each year. If you don't pay the interest, the loan grows — and that growth can eventually cause problems if left unchecked.
A note on loan interest rates: The rate you pay on a policy loan varies by carrier and product. Whole life policies typically charge a fixed rate (often between 5% and 8%) or a variable rate tied to an index. Indexed universal life policies may offer different loan structures, including indexed loans where the credited rate on collateral can potentially exceed the loan rate. The specifics of your policy's loan provisions matter enormously, and they are spelled out in your contract. If you're unsure what your policy charges, our breakdown of life insurance loan interest explains the different structures in detail.
When Borrowing Against Your Life Insurance Makes Sense
A policy loan is not inherently good or bad. It's a tool. And like any tool, its value depends on the situation. Here are the scenarios where borrowing against your cash value is a genuinely smart move.
Bridging a Short-Term Income Gap
Suppose you're 62 and retiring but plan to delay Social Security until 67 to maximize your benefit. You need income for five years. Selling stocks during a down market would lock in losses. Drawing down a 401(k) early could push you into a higher tax bracket. A policy loan lets you access money without triggering a taxable event, without selling depressed assets, and without disrupting the rest of your financial plan.
The key here is that the need is temporary and specific. You're not borrowing aimlessly — you're bridging a defined gap with a clear repayment horizon.
Generating Tax-Advantaged Retirement Income
This is one of the most powerful uses of cash value life insurance, and it's the reason many policies are designed the way they are. After years of premium payments, you can use policy loans to create a stream of retirement income that — as long as the policy remains in force — is not treated as taxable income. Unlike a 401(k) distribution or a pension payment, a life insurance loan is not income in the eyes of the IRS.
This can be especially valuable for someone who has already maximized tax-deferred and tax-free retirement accounts and needs additional income that won't inflate their adjusted gross income — which can affect Medicare premiums, Social Security taxation, and capital gains rates.
The planning principle: Policy loans for retirement income work best when the policy was designed for this purpose from the beginning — with paid-up additions to maximize cash value growth and a clear projection of when income would begin. Taking loans from a policy that wasn't designed for income distribution requires more careful analysis.
Covering an Emergency Without Triggering Taxes
Life happens. A medical expense, a family obligation, a needed home repair. If you have cash value available, a policy loan gives you access to funds quickly without the tax consequences of withdrawing cash value above your cost basis or the penalties of pulling from a qualified retirement account before age 59½.
The advantage here is speed and simplicity. No bank approval. No market timing. No early withdrawal penalties. You borrow against what you already own, use the funds, and repay when you're able.
Funding an Opportunity With a Plan to Repay
Some policyholders use loans to fund real estate purchases, business investments, or other opportunities where the expected return exceeds the cost of the loan interest. This is the concept of leverage through life insurance, and it can work — but only when the policyholder has a realistic repayment plan and understands the loan cost structure.
The word "realistic" does a lot of heavy lifting in that sentence. Borrowing against your policy to invest in a rental property with strong cash flow and a clear timeline to repay the loan is reasonable. Borrowing against your policy because someone told you that leverage is how wealthy people build wealth — without a specific plan for how the money comes back — is not the same thing.
When Borrowing Against Your Life Insurance Doesn't Make Sense
The flexibility of a policy loan is a genuine advantage. But flexibility without discipline can create serious problems — some of which don't become visible until years later.
When You Have No Repayment Plan
The most common mistake we see is treating a policy loan like free money. Because there's no required payment, no one calling to collect, and no due date, it's easy to borrow and then simply… not think about it. The problem is that interest keeps compounding. Year after year, the loan balance grows. And if the total loan balance ever exceeds the cash surrender value of the policy, the insurer will terminate the policy to protect itself.
That's when the real damage happens — and we'll cover exactly why in the next section.
When the Loan Interest Exceeds Your Policy's Growth Rate
Every policy loan has a cost: the interest charged on the borrowed amount. Whether that cost is tolerable depends on the relationship between the loan rate and the rate at which your cash value grows.
On some policies, particularly certain indexed universal life contracts, there can be a positive spread — the cash value grows faster than the loan costs. On other policies, especially during periods of rising interest rates, the loan may cost more than the policy earns. In that case, every year the loan exists, you're losing ground.
This is why understanding your specific policy's loan provisions — and not just the general concept of policy loans — matters so much.
When You'd Be Better Off With a Withdrawal
A loan isn't the only way to access cash value. You can also take a partial withdrawal (sometimes called a partial surrender). Withdrawals up to your cost basis — the total premiums you've paid — generally come out tax-free. For smaller amounts, a withdrawal might be the cleaner option because there's no interest accruing and no loan balance to manage.
The tradeoff is that withdrawals permanently reduce your cash value and death benefit, while loans leave the cash value intact (it just becomes collateral). Which is better depends on whether you need the death benefit at its current level and whether you plan to repay. There's a detailed comparison in our guide to cash value withdrawals.
When Someone Is Telling You to Borrow Against One Policy to Buy Another
This one deserves a direct warning. Over the past several years, a marketing strategy has emerged in which agents encourage policyholders to borrow against an existing life insurance policy and use the loan proceeds to purchase a second (or third) life insurance policy — framing it as a way to "use leverage" to scale your cash value.
The math doesn't hold up. Life insurance has acquisition costs — commissions, policy charges, cost of insurance — that create a drag on the new policy's early cash value. You are borrowing money, paying interest on that money, and using it to buy an asset that won't be worth what you paid for it for several years. The primary beneficiary of this strategy is the agent earning a new commission, not the policyholder.
We've run the numbers on this concept extensively. In every reasonable scenario, the policyholder ends up with less total cash value than they would have by simply leaving the original policy alone. The only scenario where leveraging life insurance to buy more life insurance shows a theoretical advantage requires assuming maximum index crediting rates over decades — an assumption that has no guarantee of materializing.
The bottom line on leveraged life insurance purchases: If someone is telling you to borrow against your existing policy to buy a new one, ask them to show you the numbers compared to simply not borrowing at all. The comparison is usually unflattering to the strategy they're selling.
The Risks Most People Underestimate
Policy loans are marketed as low-risk because your own cash value serves as collateral. That's true — but "low risk" is not the same as "no risk." There are three specific dangers that catch policyholders off guard.
The Compounding Loan Problem
Because no one requires you to make a payment, unpaid interest simply gets added to the loan balance. That larger balance then accrues interest the following year. This is compounding working against you instead of for you.
Consider a $100,000 policy loan at 6% interest, left completely unpaid. After 10 years, the loan balance is approximately $179,000. After 15 years, it's roughly $240,000. After 20 years, it exceeds $320,000. Meanwhile, if your cash value is growing at 4% to 5%, the loan is outpacing the collateral. The gap between the loan balance and the available cash value narrows every year.
The Policy Lapse and Tax Bomb
If your outstanding loan balance ever reaches or exceeds your cash surrender value, the insurance company will terminate the policy. This is called a lapse — and it triggers a taxable event.
When a policy with an outstanding loan lapses, the IRS treats the difference between what you received from the policy (including loan proceeds) and your cost basis as taxable income. This can result in an enormous, unexpected tax bill — sometimes six figures — at the worst possible time.
Example: A policyholder has paid $200,000 in total premiums (their cost basis). Over the years, they've borrowed $350,000 against the policy. The policy lapses. The IRS treats $150,000 ($350,000 minus $200,000) as ordinary income. Depending on their tax bracket, that could mean a tax bill of $35,000 to $55,000 — for a policy they no longer even own. For more on the tax implications, our guide to life insurance tax consequences covers the specifics.
This is the scenario that makes financial professionals wince. The policyholder thought they were accessing tax-free money for years. Then in a single year, a large chunk of it becomes taxable. It's also worth noting that the tax treatment of policy loans depends on the policy maintaining its status as life insurance under IRS rules — if a policy has been classified as a modified endowment contract (MEC), loans are taxed differently from the outset. Some policies include an automatic premium loan provision that can accelerate lapse problems if the policyholder isn't paying attention to the policy's status.
Dividend Recognition on Whole Life
For participating whole life insurance policyholders, there's an additional consideration that most people don't know about. Some mutual insurance companies practice what's called dividend recognition — meaning the dividend paid on your policy may be reduced when a loan is outstanding.
The logic from the insurer's perspective: when cash value is pledged as loan collateral, the insurer's general account is doing the work of lending you money. The return on the collateral portion may be credited at a different (lower) rate, which can affect the dividend calculation. This means the true cost of borrowing can be higher than the stated loan interest rate — because you're also giving up some of the dividend growth you would have otherwise received.
Not every company does this, and the mechanics vary. But it's something you should understand about your specific policy before taking a loan.
Borrowing vs. Withdrawing: What's the Difference?
Policyholders often use the words "borrow" and "withdraw" interchangeably, but they are fundamentally different actions with different consequences. Here's how they compare.
| Feature | Policy Loan | Partial Withdrawal |
|---|---|---|
| Cash value impact | Stays in the policy (used as collateral) | Permanently reduced |
| Death benefit impact | Reduced by loan balance at death | Permanently reduced |
| Tax treatment | Not taxable (if policy stays in force) | Tax-free up to cost basis; taxable above |
| Interest | Accrues annually on loan balance | None |
| Repayment | Optional (but advisable) | Cannot be "repaid" — reduction is permanent |
| Lapse risk | Yes, if loan exceeds cash surrender value | Lower risk (no compounding balance) |
| Best used when | You want to keep cash value intact and plan to repay | You need a smaller amount and don't need to preserve full death benefit |
Many policyholders use a combination of both — withdrawals up to their cost basis first (tax-free, no interest), then loans beyond that point to avoid triggering taxable income. This is a common approach in retirement income planning with life insurance, and the sequencing matters. If you're considering either option — or a blend — the right approach depends on your policy type, your cost basis, your current tax situation, and what you need the money for.
Seven Questions to Ask Before You Borrow Against Your Policy
If you're seriously considering a policy loan, these are the questions that determine whether it's a good decision or a risky one. Some of these you can answer yourself. Others require looking at your specific policy contract or talking to someone who can analyze it with you.
- What is my policy's loan interest rate — and is it fixed or variable? A fixed rate gives you certainty. A variable rate means your cost of borrowing could increase over time.
- What is my policy currently crediting on cash value? If the credited rate is lower than the loan rate, you have a negative spread — the loan is costing you more than your policy is earning. If it's higher, you have a positive spread.
- Does my insurer practice dividend recognition? If you own participating whole life, an outstanding loan may reduce your annual dividend. This hidden cost makes the effective loan rate higher than the stated rate.
- What is my current cash surrender value, and how close would this loan bring me to the lapse threshold? The further your loan balance is from your surrender value, the more margin of safety you have. If a loan would use more than 70% to 80% of your available cash value, proceed with extreme caution.
- Do I have a realistic plan to repay this loan? "I'll pay it back eventually" is not a plan. A specific source of repayment — future income, a maturing asset, a defined timeline — is a plan.
- Would a partial withdrawal be the better option? If the amount you need is within your cost basis, a tax-free withdrawal with no interest cost may be simpler and safer.
- What happens to this loan if I die with it outstanding? The loan balance (plus accrued interest) is deducted from the death benefit. If you're borrowing heavily, your beneficiaries may receive substantially less than you intended.
These aren't hypothetical concerns. The answers to these questions are specific to your contract, your carrier, and your financial situation. Two policies from two different companies can have completely different loan provisions — even if both are whole life or both are IUL. The details of your specific policy are what matter.
Not sure whether borrowing is the right move for your policy?
Your policy's loan provisions, credited rates, and dividend structure are unique to your contract. If you're weighing whether to borrow against your cash value — or wondering whether there's a better way to access it — we can walk through your specific situation in about 15 minutes. No sales pitch. Just an honest look at your options.
Schedule a callDisclaimer: The examples and scenarios described in this article are hypothetical and intended for illustrative purposes only. Individual results vary based on specific products, carrier provisions, policy design, timing, and personal circumstances. Policy loan provisions, interest rates, dividend recognition practices, and tax treatment differ by carrier and product type. This is general education, not a recommendation for any specific action. Consult your policy contract and a qualified advisor before making decisions about your life insurance. Product suitability depends on individual circumstances including age, health, income needs, time horizon, and existing assets.
I have been a regular reader and believe that policy serves a purpose and can alter the outcome of a situation.
Scenario 1:
Lets say We fund policy 1 completely (7 years term). At the end of pay-period of say 7 years, policy is fully funded. In the 8th year, I purchase 2nd policy with 70% of the sum withdrawn from 1st policy. (7 years term), would that then work ?
Scenario 2
Lets say We fund policy 1 completely (7 years term). At the end of pay-period of say 7 years, policy is fully funded. In the 8th year, I purchase an immediate annuity with 70% of the sum withdrawn from 1st policy.
I have been dwelling upon and dont have a good insight on which scenario works best
I would need more clarification on some of the questions here to really evaluate what you’re asking. 70% sum withdrawn of 1st policy needs more clarification. Keep in mind that simply paying a policy for 7 years doesn’t necessarily mean it’s fully funded. So there are quite a few different assumptions we can make about what that means and what precisely is going on at that point to the policy currently in force.
It’s highly unlikely that withdrawing money from a 7 year-old policy to purchase a single premium immediate annuity will net a better result than simply exchanging the life insurance policy for an annuity via 1035 exchange, unless the remaining death benefit following the withdrawal is required/desired.
Chiefly important here is that you did not identify what specific goal one seeks to achieve by doing any of this, so at the moment it’s impossible to offer insight on if any of this is remotely plausible as a strategy for “something” though I’m going to admit upfront that I’m dubious regardless of the objective. There’s likely alternative ways to accomplish whatever you’re seeking in a better way.
For the three scenarios, does the cash value include both policies (Scenario 2) and all three policies (Scenario 3)? Or are you just looking at the cash value of the initial policy?
Cash value is for all policies involved.
You have missed a lot of detail. What is the borrowing rate, net crediting rate, tax deductible interest, policy design, proper use, timing and more?
You may not have been through very many market cycles in your career. You use RE as an example of leverage, the asset that was creamed in 2008. Then what? How’d leverage work out for those millions of people?
To write an article such as this, you really need a lot more detail and understanding. You question the reason for doing so as if advisors would incorporate this just for commission.
You may not how to build a policy for CV verses DB.
You may not know how to incorporate other insurance strategies that can actually return double digit returns in year one and will help build the entire process and get its legs even faster.
My last comment is if you’re going to call yourself an “expert” you may want to know much more about this subject than you currently do.
You should be detailed, knowledgeable, and above all accurate if you’re going to write as an “expert.”
Hi Dan,
Maybe you should spend some time looking around the web site before staging your attack on what I know and/or don’t know. Based on what you’ve put out here, I think you are far more susceptible to a criticism of lacking detailed, knowledgeable, and accurate information.
Don’t freak out when I say something you don’t like. Bring facts that show this works. Otherwise, I’m going to stick with my initial opinion.
For your cash value in the 3 scenarios, are you considering both policies (Scenario 2) and all three policies (Scenario 3)? Or are you just looking at the cash value of the original policy?
Did you run your #s Option B Max funded? I just ran your scenario and the CV ended up much more when Option B Max funded is leveraged. I specifically designed leveraged policies as the most mathematically.sound policies available and 100% of the time using historical results, enhanced the CV. When I run Option A, your #s would make more sense but no one does Option A looking to build CV. Id love to have a real conversation with you about this as I’ve run over 5000 simulations and 100% of the time using historical data or even your 6% index credit will produce enhanced results in a 25 year span like you show. AG49 only allows for a 1% spread and even then, produces enhanced CV. Can I see your math as I believe you are doing Option A which makes no sense or why your math is diminished? What carrier did you use your COI? I will recreate your scenario… for the most part I enjoyed the article until the math part… lol
If you would like to know my design, check out [self promotional book plug removed]
Hi Curtis,
All scenarios assume option B increasing death benefit with a max solve to level death benefit using option A if warranted per GPT. I can make some illustrations say whatever I or you want them to. We then have to contemplate the likelihood of such a scenario unfolding. If you think you have overwhelming evidence of this idea working, feel free to reach out to me here.
Fair warning, you won’t have my attention if you send me illustrations from anything less than five companies showing that this works across all of them.