Can you take a loan against variable life insurance?

You can take out a loan on variable life insurance and use the cash value as collateral. However, there are some major risks associated with policy loans.

Rebecca Shoenthal author photoAmanda Shih author photo

By

Rebecca Shoenthal

Rebecca Shoenthal

Editor & Licensed Life Insurance Expert

Rebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.

&Amanda Shih

Amanda Shih

Editor & Licensed Life Insurance Expert

Amanda Shih is a licensed life, disability, and health insurance expert and a former editor at Policygenius, where she covered life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.

Updated|2 min read

Policygenius content follows strict guidelines for editorial accuracy and integrity. Learn about our editorial standards and how we make money.

Variable life insurance is a type of permanent life insurance. Its cash value growth is tied to a series of sub-accounts that earn interest at different rates. Like other permanent policies, it’s possible to take a loan out against variable life insurance. You can only borrow after your cash value has grown to a certain amount set by your insurance company, which can take several years.

Key Takeaways

  • Life insurance policy loans are tax-free and have lower interest rates and faster approvals than traditional loans.

  • It can take years to build up enough cash value for a loan, so consider other options if you have a newer policy.

  • Your policy will lapse once your loan amount and interest surpass your cash value amount.

  • If you die with an outstanding policy loan, the balance is taken out of the payout to your beneficiaries.

Ready to shop for life insurance?

Start calculator

What is a variable life insurance loan?

Variable life insurance, like all permanent life insurance, has two parts: a death benefit and a cash value account that earns tax-deferred interest. A variable life insurance loan is a loan that your insurance company extends to you using your cash value as collateral.

Your insurance company charges you interest like any other lender, but repayment for life insurance loans is much more flexible than for traditional loans. How much you can borrow from your life insurance policy depends on your cash value amount. 

“Typically, permanent life insurance policies allow cash value withdrawal up to a certain amount depending on the size of the overall cash balance (up to about 95%),” says Anthony He, insurance agent and disability insurance operations manager at Policygenius.

→ Learn more about life insurance loans

quote

Typically, permanent life insurance policies allow cash value withdrawal up to a certain amount.

- Anthony He, insurance agent and disability insurance operations manager at Policygenius

gray twitter icon

Pros of a variable life insurance loan

Taking a loan against the cash value of a variable life insurance policy has three main advantages over a traditional loan:

  • Insurers (usually) charge a lower interest rate

  • The loan is tax-free

  • You can get the loan faster

There are fewer credit qualifications for life insurance loans, so you won’t get turned away like you might for a traditional loan. While you technically don’t have to pay the loan back, we don’t recommend skipping repayments because you’ll put your beneficiaries at risk of losing some or all of the death benefit.

Cons of a variable life insurance loan

Permanent life insurance policies are five to 15 times more expensive than comparable term life policies. Whether you’re taking a loan against a variable life insurance policy or any other permanent life policy, it’s important to understand your options.

  • If your loan amount becomes higher than your cash value, your policy will lapse.

  • Loans are tax-free, but the interest is taxed if you use dividends to make payments.

  • The option to take out a loan isn’t guaranteed.

  • Unpaid loans are deducted from your beneficiaries’ payout when you die.

How to take out a variable life insurance loan

If you have the cash value built up, taking out a loan against your variable life insurance policy can be an easy and smart financial move in certain circumstances. Before you do so, talk to a licensed insurance agent or financial advisor. A life insurance loan has unique strengths, but also unique risks. If you decide to take the loan, talk to your insurance company about the next steps.

Frequently asked questions

Can you borrow against a variable life insurance policy?

Once you’ve accumulated enough cash value, you can borrow against your variable life policy using your cash value as collateral.

Can you cash out a variable life insurance policy?

You can cash out variable life insurance, but you’ll lose your coverage and may be charged taxes and administrative fees.

Do you have to pay back a life insurance loan?

Technically you don’t have to pay back a life insurance loan. But if you don’t repay your loan, your policy can lapse or the unpaid amount will be taken out of the death benefit.