Short answer: a policy loan borrows against the cash value of a permanent life insurance policy. Check whether your policy has cash value and allows loans. A policy loan is not free: the SEC’s investor site says policy loans “reduce your policy’s cash value, which increases the likelihood your policy will lapse” and “may reduce your death benefit” (Investor.gov, read October 30, 2026). A personal loan leaves the policy alone but adds a fixed monthly payment. This is general information, not financial, tax or legal advice.
What the SEC says about policy loans
The Investor.gov page is about variable life insurance; your own policy contract sets the rules for your loan. It lists these effects of policy loans (Investor.gov):
- “They reduce your policy’s cash value, which increases the likelihood your policy will lapse.”
- “They may reduce your death benefit.”
- “They are typically not subject to surrender charges.”
- “You will typically owe interest on the amount borrowed.”
On lapse, it says: “If you do not maintain sufficient cash value to pay your policy’s fees and expenses, your policy may lapse. That means it will terminate without value and your beneficiary will not receive any death benefit. This might occur due to policy fees and expenses, poor investment performance or loans.”
Side by side
| Policy loan | Personal loan | |
|---|---|---|
| What you borrow against | Your policy’s cash value | Your credit and income (unsecured) |
| Interest | Charged on the amount outstanding; ask your insurer for the rate and how it is added | APR disclosed before you sign |
| Repayment | Set by your policy; ask whether a schedule is required | Fixed monthly payments over a set term |
| If you do not repay | The loan and interest can reduce the cash value and death benefit, and the policy may lapse | Late fees and other terms set by your loan agreement |
| Effect on coverage | Can reduce what your beneficiary receives | None on the policy |
Sources: Investor.gov for the policy loan column. For personal loan terms, see personal loan APR vs interest rate and compare the APR on each offer.
The tax point if the policy ends
Investor.gov says: “You may take loans from your policy without paying federal income taxes. However, if your policy terminates with a loan outstanding, you may owe federal income taxes on the loan” (Investor.gov).
That tax-free loan point does not hold for a modified endowment contract (MEC). Under the tax code, a loan from a MEC is treated as an amount received under the contract, and it is included in gross income to the extent allocable to income on the contract; a 10% additional tax applies to the taxable part, with exceptions that include amounts received on or after age 59½ (26 U.S.C. 72(e)(2)(B), (e)(4)(A), (e)(10) and (v), read October 30, 2026). A MEC is generally a policy entered into on or after June 21, 1988 that fails the “7-pay test”, which looks at how much was paid in during the first 7 contract years (26 U.S.C. 7702A). Ask your insurer in writing whether your policy is a MEC before you borrow from it.
The IRS says that if you surrender a life insurance policy for cash, “you must include in income any proceeds that are more than the cost of the life insurance policy”, and that your cost is generally the premiums you paid, less any refunded premiums, rebates, dividends, or unrepaid loans that weren’t included in your income (IRS Pub. 525, read October 30, 2026). Ask a tax professional before you let a policy with a loan lapse or surrender it. This is not tax advice.
Questions to ask your insurer
- How much cash value can I borrow, and what is the loan interest rate? Is it fixed or variable?
- Is interest billed to me, or added to the loan balance if I do not pay it?
- How much would the death benefit drop with this loan outstanding?
- Is my policy a modified endowment contract (MEC)?
- At what loan balance would the policy be at risk of lapsing, and will you warn me first?
- Can I repay in any amount, at any time?
- Ask for an in-force illustration showing the policy with the loan.
A $2,000 example, only for the math
This example is only for the math. It shows $2,000 repaid over 24 months at the Federal Reserve’s August 2026 averages: 11.90% APR for 24-month personal loans and 22.36% for credit card plans (G.19). For a policy loan, use the rate your insurer quotes, and ask what happens to unpaid interest.
| Option | Monthly payment | Interest | Total paid |
|---|---|---|---|
| Personal loan at 11.90% | $94.05 | $257.20 | $2,257.20 |
| Credit card at 22.36% | $104.11 | $498.64 | $2,498.64 |
$94.05 x 24 = $2,257.20, and $104.11 x 24 = $2,498.64. Your rate depends on your credit and the lender. Before you add a payment, see how to budget for a loan payment.
Compare other ways to borrow against what you own
Checklist
- Confirm your policy has cash value and allows loans.
- Get the loan rate and how unpaid interest is handled in writing.
- Ask how the loan changes the death benefit, and tell your beneficiaries if it matters to them.
- Watch the loan balance against the cash value so the policy does not lapse.
- Ask a tax professional before a policy with a loan ends.
- Compare the full cost with a personal loan’s APR.
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Sources
- Investor.gov (U.S. Securities and Exchange Commission): Variable Life Insurance
- 26 U.S.C. 72, Annuities; certain proceeds of endowment and life insurance contracts (U.S. Code, 2023 edition, govinfo)
- 26 U.S.C. 7702A, Modified endowment contract defined (U.S. Code, 2023 edition, govinfo)
- IRS Publication 525 (2025), Taxable and Nontaxable Income (last reviewed or updated April 30, 2026)
- Federal Reserve: G.19 Consumer Credit (released October 7, 2026), terms of credit, August 2026: credit card plans and 24-month personal loans
Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.