If you own permanent life insurance (such as whole life or universal life), you may be able to borrow against the policy’s cash value as a source of flexible funding in retirement. Because you’re essentially borrowing from your own policy, these loans are usually easier to access than traditional bank loans and can be structured in a way that fits your retirement cash-flow needs. Still, they come with real risks if not managed carefully, especially for retirees who want to preserve their death benefit for heirs.

 

How policy loans work

• You’re borrowing against cash value, not starting a new loan from scratch.

  • Permanent life insurance builds cash value over time, and the insurer will typically allow you to borrow up to a certain percentage of that value.

  • There is no credit check or lengthy underwriting process, because the policy itself serves as collateral.

• Interest is charged, but terms are often more flexible than bank loans.

  • Policy loan interest rates are often lower than unsecured personal loan rates.

  • You usually have control over repayment timing—there is no fixed monthly payment unless you set one up.

• The insurer keeps your policy in force as long as there is enough remaining cash value.

  • If you make at least interest payments, the loan balance will grow more slowly.

  • If you pay back principal over time, you can restore your cash value and preserve more of the death benefit.

Key advantages for retirees

• No credit impact and quick access to funds.

  • Because there’s no credit check, a policy loan won’t show up as a new inquiry or new account on your credit report.

  • This can be useful for retirees living on fixed incomes who may not qualify easily for other credit.

• Flexible repayment schedule.

  • Unlike 401(k) loans, there is generally no mandatory repayment timeline and no penalty for taking longer—you decide how aggressively to repay.

  • This flexibility can help you manage uneven expenses (like medical bills or home repairs) without disrupting your day-to-day budget.

• Possible way to avoid disrupting investment portfolios.

  • Instead of selling investments in a down market, a retiree might temporarily use a policy loan to cover medium-term needs and then pay it back when markets recover or other cash becomes available.

Risks and trade-offs to consider

• Reduced death benefit if the loan isn’t repaid.

  • Any unpaid loan balance plus interest is subtracted from the policy’s death benefit.

  • If leaving money to heirs, charities, or a spouse is a key goal, this reduction can be significant.

• Risk of policy lapse.

  • If the loan balance plus accumulated interest grows larger than the policy’s remaining cash value, the policy can lapse (terminate).

  • A lapse can trigger unexpected taxes if the outstanding loan exceeds what you’ve paid into the policy.

• Not a solution for ongoing budget shortfalls.

  • Using policy loans repeatedly to cover everyday expenses can slowly drain the policy and undermine your overall retirement plan.

  • They should be viewed as a targeted tool for specific, medium-term needs—not a substitute for a sustainable budget.

When this option may make sense

• You have a permanent life insurance policy with significant cash value and no immediate plans to surrender it.

• You need medium-term liquidity (for example, covering several months of higher expenses, medical costs, or a major repair) and want to avoid selling investments at a bad time.

• You are comfortable with a plan to repay at least part of the loan over time to protect your death benefit.

• Providing a large inheritance is helpful but not absolutely essential, or you have other assets to leave to beneficiaries.

Questions to ask before borrowing

• What is the current cash value, and how much can I borrow without putting the policy at risk of lapse?

• What interest rate applies to policy loans, and is it fixed or variable?

• How will interest be added—annually, monthly, or daily—and what happens if I only pay the interest?

• How much would my death benefit be reduced if I never repay the principal?

• Are there any fees associated with taking or maintaining a loan?

• What are the tax implications if the policy lapses while a loan is outstanding?

Practical steps before you proceed

• Review your policy in detail to confirm:

  • Loan provisions and limits

  • Interest rate and how it can change

  • How the insurer calculates and applies interest

• Talk with your insurance agent or a trusted financial professional about:

  • A safe maximum loan amount that won’t endanger the policy

  • A realistic repayment plan that fits your retirement budget

  • How this loan fits with your broader retirement, debt, and estate plans

• Compare this option with others (such as adjusting your budget, using savings, or considering other types of loans) to be sure it’s the best fit for your situation.

 

Further learning from Cambridge Credit

These Cambridge Credit resources can help you think about where a policy loan fits into your overall financial picture:

• Credit Basics – Overview of how credit works and how interest rates on loans and other obligations can affect your financial life. Cambridge Credit Counseling

• Planning for Retirement – Guidance on planning for medical costs, long-term care, and other major retirement expenses that policy loans might help cover in the short term. Cambridge Credit Counseling

• Financial Education Articles & Portal – Central hub with educational articles on budgeting, debt, and long-term planning. Cambridge Credit Counseling

• Financial Education Tools & Guides – Worksheets, guides, and brochures to help you build a realistic budget and evaluate different borrowing options in retirement. Cambridge Credit Counseling