The different ways to access a policy’s cash value

Policy loans are often the preferred way to access cash value, for a number of reasons which we will explain below. However, before we do so, you should know that there are typically three other ways to make use of the cash value of a permanent life policy:


One option is to cancel your policy and take the surrender value cash payment. However, with this option, you will no longer have life insurance coverage and the cash you receive will be reduced by surrender fees, which can be significant. Therefore, many experienced professionals feel that surrender before retirement should be a last resort, especially if you don't have other coverage.


In many situations, you can take a cash withdrawal. While that money may not be subject to income taxes, there are potential disadvantages: your death benefit will probably be reduced, and that reduction may be greater than the amount withdrawn, depending on your policy. Talk to your insurance agent or the insurance company to find out about their specific withdrawal rules and policies. 

Use cash value to pay your premiums

You can typically use the money in your cash value to pay part or all your life insurance premiums, allowing you to keep your coverage in force even if you're low on cash from other sources. This is a popular option for older policyholders who must use retirement income for living expenses but still want to keep their coverage.

Life insurance loans

The fourth way to access cash value is by taking out a loan. Many insurers allow you to borrow up to 90% of your total cash value. The loan interest rate is usually lower than the rate on a personal or home equity loan, and the loan can be used for any purpose. But it’s important to note that many policy owners reserve this option for situations when they need “fast cash” that they intend to pay back. Why? Because if the loan is not repaid, you will end up with a reduced death benefit – the death benefit of the policy will be reduced by the loan balance and any interest accrued. There are also circumstances under which – absent repayment of the loan – the policy can lapse. So, these loans have both advantages and drawbacks, as do the other options mentioned above.

Life Insurance Loans: Advantages

No impact on your credit

Securing a policy loan doesn't require a credit check or any type of employment or income verification. Assuming that you have reached the required level of cash value, there is no approval process. Instead, you fill out a loan request, and generally, you will have the funds in a matter of days.

An affordable source of funds

The interest rate on policy loans is usually less than the rate charged for personal or even home equity loans.

Cash value continues to compound

The funds for a life insurance policy loan don't come out of your policy. Instead, it's an actual loan from the life insurance company that issues the policy or a related entity. This means that your cash value will continue to grow (via interest or investment gains) even while you have an outstanding loan.

You can choose to repay however you want – or not at all

You can repay the loan on whatever repayment schedule works best for you. Some policyholders choose to repay in one lump sum; others prefer to repay over time, in small, regular payments. Others may choose not to repay the loan at all – but any outstanding loan balance will be deducted from the eventual death benefit.

You continue to have life insurance protection

If the loan balance plus interest is paid back in full and in a timely manner, the policy is unchanged, and the death benefit remains exactly the same as it was prior to taking out the loan.

Life Insurance Loans: Potential Drawbacks

Loans may not be immediately available

It may take several years for your cash value to grow to a meaningful amount for you to borrow money against your policy. However, if your cash value has not reached that level, you'll have to look elsewhere for your loan.

Unpaid loan balances reduce the death benefit

If you pass away before your loan balance is repaid in full, the benefit payout will be reduced by the amount still owed. In other words, your beneficiaries will receive less money.

Coverage may lapse in certain situations

If you don't repay the loan promptly, there is a chance that the loan balance plus loan interest will exceed the cash value of your life insurance policy. If that happens, the insurance company can surrender the policy, leaving you without any life insurance coverage.

There may be tax consequences

If you don't repay your loan balance and/or your policy lapses, you or your beneficiaries may owe income taxes on the amount borrowed. There are other potential tax consequences related to life insurance loans, so be sure to discuss them with your financial and tax professionals, insurance agent, or insurance company representative before taking out a loan.

Next Steps

Life insurance loans can be a convenient and affordable way for policyholders to access extra cash if the need arises. And, if one repays a policy loan in full and in a timely manner, there may be no financial drawbacks. However, before taking a loan against your life insurance policy, be sure to speak to a trusted financial and tax professional, your insurance agent, or an insurance company representative. They can help you to evaluate your options – withdrawal, surrender, or loan – and help you to better understand the pros and cons of each. If you do take out a policy loan, remember to keep a close eye on your outstanding loan balance: You want to make sure it is not approaching your cash value, which could cause the policy to lapse. However, if you make adequate loan payments in a timely manner, that shouldn’t be an issue.

Or, maybe you don't currently have a permanent life insurance policy, and you're interested in learning more about it can provide life-long protection while helping to build wealth with tax advantages. In that case, you should speak with an experienced professional who can thoroughly explain how whole life and universal life insurance work and help you decide if either type of policy is a good fit for your financial needs. If you don't have a financial professional to discuss insurance with, Guardian can help you to find a nearby financial professional who will listen to your needs and help guide you to the right solution for you.

Frequently asked questions about life insurance loans

Can you borrow from your life insurance?

Yes. Once the cash value of your permanent life insurance policy reaches a certain level, you will be able to take out a loan against it. Many policy owners reserve this option for situations when they need “fast cash” that they intend to repay.

What is a loan on a life insurance policy?

When taking out a life insurance policy loan, you are basically borrowing money from the insurance company using your life insurance policy's cash value as collateral. There is no application, no credit check, and no approval process. You will have to pay interest, but it will typically be at a lower rate than you would pay on a personal loan or home equity loan.

Do you have to pay back loans on life insurance?

You are not required to repay these loans. However, absent repayment, interest will continue to accrue, and, ultimately, the death benefit of the policy will be reduced by the amount of the loan and interest. Plus, if the balance of the loan plus interest reaches a certain level, your policy may be canceled, and/or there may be adverse tax consequences.

When must a life insurance policy loan be repaid?

You can repay policy loans on whatever repayment schedule best fits your needs – with a large, lump sum payment, small, regular payments, or a combination of large and small payments. You can also choose not to repay the loan. However, loan interest will continue to accrue on the unpaid balance, which can reduce the death benefit or even put you at risk of losing coverage entirely. Plus, there may be negative tax consequences.

What could be the potential result of taking out a cash loan under a life insurance policy?         

If you repay the loan and interest in total, there will be no change in your death benefit or the status of your policy. However, if you haven't paid back the full balance of the loan and loan interest prior to your death, life insurance companies will reduce the benefit payout. Further, if the balance of the loan plus interest reaches a certain level, you could be at risk of policy cancellation and/or adverse tax consequences.

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This article is for informational purposes only. Guardian may not offer all products discussed. Please consult with a financial professional to understand what life insurance products are available for sale.

1 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

2 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial professional and refer to your individual whole life policy illustration for more information.

3 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

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