Recently, someone asked me about borrowing money from a life insurance policy, and I realized that many people actually don’t know this option exists. If you have a permanent life insurance policy with accumulated cash value, you can actually borrow against it, which is especially useful when you need liquidity in the short term.

First, let’s be clear: not all life insurance policies allow borrowing. You can only borrow from permanent insurance, such as whole life or universal life policies. Term life insurance doesn’t qualify because it has no cash value, and the insurance company has nothing to use as collateral. This is a key distinction.

The way permanent life insurance works is this: a portion of your monthly premium is deposited into an account, which is your cash value. The insurance company calculates interest on it in different ways depending on the policy type. The important point is that this accumulated cash value is the basis for your loan.

The process of borrowing is actually very simple. You don’t need a credit check or to explain why you’re borrowing. Insurance companies typically allow you to borrow 80% to 90% of your cash value. Since this money is essentially yours, the interest rate is usually quite low. The whole process is also much faster than other types of loans.

But there’s an important trade-off here. Once you borrow from your life insurance policy, the policy’s value decreases until you repay the debt. If you don’t repay it, the insurance company will deduct the amount from your cash account. If you pass away with an outstanding loan, they will deduct it from your death benefit. So, it’s not a decision to take lightly.

My view is that borrowing from a life insurance policy can be a good emergency option, especially when you need short-term funds. But don’t treat it as a source of investment capital—that’s too risky. If you’re considering this option, it’s best to talk to a financial advisor first to make sure it’s truly suitable for your situation. After all, the choice of a life insurance policy will have long-term impacts on your financial planning.