Questions to Ask Your Carrier Before Borrowing Against a Policy
Why ask before you borrow
A policy loan is easy to take. No credit check, money in days, which is exactly why people skip the questions. But the cost and the risk are specific to your policy and carrier, and the worst outcomes (a lapse, a surprise tax bill) come from not knowing the numbers up front. So treat the call as part of borrowing, not optional.
Read these straight off the page when you call the policyholder line.
The cost questions
- What's the loan interest rate, and is it fixed or variable? A variable rate can climb later.
- Is this policy direct recognition or non-direct recognition? This changes whether your dividend keeps crediting on the borrowed portion, which changes your real cost.
- How much can I borrow right now, and how is that maximum calculated?
The risk questions
- At what point would an unpaid loan put the policy at risk of lapsing? Ask for the loan-to-cash-value level that triggers it.
- Will you notify me before the policy reaches that point? Get the alert in place.
- What happens to my death benefit while the loan is outstanding? It's reduced by the balance. Confirm by how much.
The tax questions
- Could borrowing create a tax issue now or later? Generally a loan isn't taxable while the policy stays in force, but a lapse with a loan can be.
- Is my policy a Modified Endowment Contract (MEC)? If so, loans and withdrawals are taxed differently: gains first, with a possible penalty before 59½.
(These are questions for a tax advisor too. The carrier can tell you the mechanics, not your personal tax outcome.)
The flexibility questions
- Do I have to repay on a schedule, or can I pay interest only? Most loans are flexible, but confirm.
- Are there other ways to access value (a partial withdrawal, or pledging the policy to an outside lender) that might fit better?
Before you hang up
Ask for an in-force illustration that models the loan, ideally at guaranteed (worst-case) charges, not just the optimistic projection. That single document turns all of the above into your actual dollars.
Download the carrier questions checklist. Print it, call the policyholder line, and fill in the numbers before you borrow.
Get the checklistTaking these questions to your carrier? Cove answers the same ones up front, including the rate, recognition treatment, and the lapse line, and shows its number beside your carrier's. See what Cove would offer →
FAQ
What's the most important number to ask for?
The loan-to-cash-value level that would trigger a lapse. Once you know where that line is, you know how much room you have before an unpaid loan puts the policy at risk.
Does taking a policy loan affect my credit?
No. There's no credit check, because you're borrowing against your own cash value. That's also why people take loans casually without asking the questions first.
Will I owe taxes on a policy loan?
Generally not while the policy stays in force. The risk is a lapse with a loan outstanding, which can turn a gain into taxable income, and a Modified Endowment Contract changes the math. Confirm your own situation with a tax advisor.
Should I ask for an in-force illustration before borrowing?
Yes. Ask for one that models the loan at guaranteed (worst-case) charges, not just the optimistic projection. It turns the carrier's answers into your actual dollars.
Sources
- Investopedia: Life Insurance Policy Loans: Pros and Cons investopedia.com (accessed 2026-06-28)
- NAIC: Life Insurance (consumer) content.naic.org (accessed 2026-06-28)
- IRS: Publication 525, Taxable and Nontaxable Income irs.gov (accessed 2026-06-28)
This article is for general educational purposes only and is not insurance, tax, or legal advice. Cove does not sell insurance and is not affiliated with any insurer. Any figures are illustrative and vary by policy, carrier, and state. Confirm specifics with your carrier and a qualified tax or legal professional. Last updated June 2026.