Glossary

Policy loan

Money borrowed from an insurer using a permanent policy's cash value as collateral, with no credit check and no required repayment schedule.

Also called: life insurance loan, cash value loan

A policy loan lets the owner of a permanent policy borrow from the insurer against the policy's cash value. Technically you aren't withdrawing your own money: the insurer lends its money and holds the cash value as collateral. There's no application, credit check or fixed repayment schedule.

Interest accrues at a fixed or variable rate set in the contract, and unpaid interest is added to the loan balance. Any outstanding balance is subtracted from the death benefit or the surrender value. Hypothetically, if a $250,000 policy has a $40,000 loan balance when the insured dies, the beneficiary receives $210,000. Depending on the policy, borrowed cash value may earn a different crediting rate or dividend than unborrowed value.

The main risk is a growing loan that overtakes the cash value. When that happens the policy can lapse, and the canceled loan counts as a distribution: any amount above the premiums you paid can be taxable income even though you receive no cash. Loans from a policy that failed the seven-pay test and became a modified endowment contract are taxed differently and can carry a penalty. Our guide to life insurance policy loans: how they work and what they risk and the policy loan calculator show how balances compound.

Last reviewed October 4, 2026

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Related terms

Cash value The savings component that builds inside whole life, universal life and other permanent policies, which the owner can borrow against or withdraw. Policy loan interest What an insurer charges on money borrowed against a policy's cash value, at a fixed or variable rate, and added to the loan balance if left unpaid. Cash surrender value What a permanent policy pays the owner on cancellation: the accumulated savings minus surrender charges and any outstanding loans. Lapse The end of coverage because a premium went unpaid past the grace period or, in universal life, because cash value could no longer cover the charges. Seven-pay test The IRS test that flags a policy as a modified endowment contract if premiums in its first seven years exceed what would pay it up in seven level payments.

Related guides

1035 exchanges: swapping policies without tax Section 1035 lets you swap a life policy for another policy or an annuity without taxing the gain. What qualifies, what you can lose and how to do one right. Automatic premium loans An automatic premium loan pays missed premiums from your cash value. How it works, what it costs, and the lapse and tax risks of leaving it running. Withdrawing cash value from a life insurance policy How partial withdrawals from permanent policies work, what they do to the death benefit, when they are taxed, and how they differ from loans and surrender. Collateral assignment of life insurance How pledging a life insurance policy to a lender works, what the lender can collect, how it affects your beneficiaries, and how to release it. Life insurance in nonqualified deferred compensation How employers use company-owned life insurance to informally fund nonqualified deferred compensation, with IRC 409A, 101(j) and 264 rules and creditor risks. Elder financial abuse involving life insurance How older adults lose money through life insurance: forged beneficiary changes, drained cash value, pressured sales. Warning signs, safeguards and reporting.

Related tools

Policy loan calculator Projects how a life insurance policy loan grows, how it cuts the death benefit, and the year it could overtake the policy's cash value.