Borrowing against your policy

How it works

• You borrow against the policy's cash value, which secures the loan
• Interest accrues, at a rate set by the policy
• There's generally no fixed repayment schedule
• An outstanding balance reduces the death benefit
• Unpaid interest is typically added to the loan balance

The compounding problem

Because interest accrues and unpaid interest is added to the balance, a loan left alone grows. If it grows to approach the policy's cash value, the policy can lapse.

That's the failure mode: a loan taken years ago, never repaid, quietly consuming the policy until it collapses — often with a tax consequence attached to the lapse.

The tax point people miss

While a policy remains in force, loans are generally not treated as taxable income. If the policy lapses or is surrendered with an outstanding loan, there can be a taxable event on the gain.

That means a policy collapsing under its own loan can produce a tax bill on top of losing the coverage. This is worth a conversation with a tax professional, not a rule of thumb.

If you take one

• Ask the interest rate and how it's applied
• Ask what balance would cause the policy to lapse
• Request an in-force illustration showing the loan's effect over time
• Pay at least the interest annually if you can
• Review the balance at every annual policy review