Can you borrow against a life insurance policy?

This answer is about Life insurance.

How a policy loan works

The insurer uses your cash value as collateral, so no credit check or income verification is required. Interest accrues at the rate stated in the contract (fixed or variable). You can typically borrow up to a stated percentage of the available cash value.

Impact on the death benefit

If the insured dies with a policy loan outstanding, the insurer pays the death benefit minus the loan balance plus accrued interest. Unpaid loans can also, over time, eat into the cash value enough to cause a policy to lapse.

Taxes on policy loans

A loan is generally not taxable as long as the policy stays in force and is not classified as a modified endowment contract (MEC). If the policy lapses or is surrendered while a loan is outstanding, the loan can become taxable to the extent it exceeds your cost basis.

When it makes sense — and when it doesn't

• Can make sense: short-term liquidity when you don't want to disturb other investments and understand the impact on the death benefit.
• Rarely makes sense: as a long-term retirement funding strategy without a clear plan to keep the policy in force.
• Avoid: taking a loan you can't afford to service if it risks lapsing the policy and creating a taxable event.

Ask for an in-force illustration showing the loan's long-term impact on cash value and the death benefit before borrowing.