How Does Borrowing From Life Insurance Work? 
The way policy loans work vary by product and company but the basic idea is that you can borrow from an asset you own . Policy loans are possible on cash value life insurance once it accumulates enough cash surrender value . Each policy contains provisions which explain how policy loans can function for that particular contract . You can ask your agent or the insurance company directly for the loanable value of the policy . Unlike most conventional loans from a bank however , repayment is actually not required . If the loan is not repaid prior to the death of the insured , the amount will simply be subtracted from the policy , reducing the death benefit . Taking a policy loan is not the same as withdrawing cash values . The insurance company will charge you interest on the money you receive from the loan . In most policies , dividends are not paid -LRB- or on non participating policies , the interest rate credited is reduced -RRB- on the amount of the cash value impaired by a loan . In other words , there is usually a material net cost of borrowing which will add drag to the policy over the years . Usually , policy owners call up the insurance company , request a policy loan and do not repay it or the loan interest over time . In this case , the interest will be added to the loan , and loan will continue to accrue interest at an even greater rate . If the loan exceeds the cash value , the policy will eventually lapse . Whats worse , any gain -LRB- gross cash value minus premiums paid -RRB- becomes taxable income . Obviously , this should be avoided , so it is especially important to work with your life insurance professional to manage your policy carefully . Note that interest rates and loan provisions vary widely for policy loans : recent product innovations through loans have become quite complex . Since some policies are better than others for taking policy loans , your life insurance professional can help identify the best way to proceed whether analyzing a policy with an existing loan or planning the purchase of a new policy with the idea of taking policy loans in the future e.g. to supplement a retirement plan . 