How to Borrow Against Life Insurance: A Guide for Florida Families and Business Owners
Can you borrow money from a life insurance policy?
Yes—but only certain policies have cash value.
The loan is not free money. Interest applies. An unmanaged loan can also reduce your death benefit or cause the policy to lapse.
Here is how it actually works.
Which Life Insurance Policies Allow Loans?
You can generally borrow against permanent life insurance that has accumulated cash value.
✓ Whole life insurance
✓ Some universal life policies
✗ Term life insurance
Term insurance normally has no cash value. There is nothing to borrow against.
Compare whole life and term life insurance.
How Does a Life Insurance Policy Loan Work?
You do not withdraw the money directly from your policy.
The insurance company lends you money. Your policy’s cash value acts as collateral.
The process is simple:
→ Your policy builds cash value
→ You request a loan from the insurer
→ The insurer sends you the money
→ Interest begins to accrue
→ You repay the loan on your schedule, subject to the policy contract
A traditional credit check or income verification is generally not required. Loan availability is based on the policy’s current loan value—not its total death benefit.
How Much Can You Borrow?
The amount depends on:
Your available cash value
The insurer’s loan limits
Existing policy loans
The terms of your contract
You normally cannot borrow the entire death benefit.
Before taking a loan, request the exact available amount from the insurance company.
Does Your Cash Value Keep Growing?
The policy continues operating while a loan is outstanding.
However, the exact effect depends on the contract.
Some insurers use direct recognition. This may change how dividends are calculated on the portion securing the loan.
Others use non-direct recognition. But the loan still charges interest.
⚠️ Dividends are not guaranteed.
Ask your agent or insurer for an in-force illustration showing the loan, interest and planned repayment.
What Does a Policy Loan Cost?
Policy loans charge interest.
The rate may be:
Fixed
Variable
Paid annually
Added to the loan balance
If you do not pay the interest, it may compound.
That means a small loan can become much larger over time.
Before borrowing, compare the policy loan with:
✓ Paying cash
✓ A bank loan
✓ A line of credit
✓ Delaying the purchase
Access to money does not automatically make borrowing the best decision.
Do You Have to Repay the Loan?
Many policy loans do not require fixed monthly payments.
That flexibility is useful—but repayment still matters.
If you do not repay the loan:
⚠️ Interest continues to grow
⚠️ Your available cash value may fall
⚠️ Your death benefit may be reduced
⚠️ The policy could lapse
If the insured dies with an outstanding loan, the insurer generally subtracts the balance and unpaid interest from the death benefit.
Are Policy Loans Tax-Free?
A policy loan is generally not treated as taxable income when:
✓ The policy is not a Modified Endowment Contract
✓ The policy remains in force
✓ The transaction is handled correctly
Taxes may become due if a policy with a gain lapses or is surrendered while a loan is outstanding.
Modified Endowment Contracts follow different tax rules.
“Tax-free” is not an unconditional guarantee. Large loans should be reviewed with a qualified tax professional.
Florida Policyowners: One Important Fact
Florida law may protect the cash surrender value of qualifying life insurance policies from certain creditor claims.
Florida Statute 222.14 addresses protection from attachment, garnishment and legal process.
The result depends on residency, ownership, timing and the facts of the case.
Speak with a Florida attorney before relying on a life insurance policy for asset protection.
When Can a Policy Loan Make Sense?
A policy loan may be useful for:
Business equipment
Short-term working capital
Real-estate expenses
Home renovations
Vehicle purchases
Education costs
Temporary cash-flow needs
Refinancing more expensive debt
The loan should have a clear purpose and a realistic management plan.
When Is It a Bad Idea?
A policy loan may not make sense if:
✗ The policy has little cash value
✗ You cannot comfortably fund the policy
✗ You have no repayment plan
✗ The loan is being used for speculation
✗ The loan could place the policy at risk
✗ A cheaper source of capital is available
Questions to Ask Before Borrowing
How much can I borrow today?
Is the interest rate fixed or variable?
When is interest charged?
How will the loan affect dividends?
How will it affect the death benefit?
What happens if I make no payments?
Could the policy lapse under conservative assumptions?
Is the policy classified as a MEC?
Can I see an in-force illustration with the loan included?
The Bottom Line
Borrowing against life insurance can provide flexible access to capital.
But it is still a loan.
Interest accrues. Unpaid balances reduce policy benefits. Excessive borrowing can cause a lapse and possible tax consequences.
The strategy works best when the policy is properly designed, the loan has a clear purpose and the balance is monitored.
Learn more about how the Infinite Banking Concept works, read our Infinite Banking FAQ, or book a 15-minute consultation.
This article is educational and is not individualized legal, tax or financial advice.
