When cash gets tight, a whole life insurance policy can look like a ready-made backup plan. Its built-in cash value may allow a fast loan without the paperwork of a bank.

That convenience is real, but it can also hide risks that chip away at protection, savings goals, and even create a tax bill at the worst time.

Cash Value

Whole life insurance differs from term coverage because it can build cash value while keeping lifetime protection in force, as long as premiums are paid. Part of each premium helps fund the death benefit, and part may accumulate inside the policy. Over time, some policies may also credit dividends that can bolster cash value or offset premiums.

Loan Appeal

A policy loan can feel unusually easy. If enough cash value has accumulated, the insurer typically can’t deny the request, and credit scores usually don’t matter. Many policies charge interest rates that are competitive with common personal loans. For someone facing an urgent bill, that mix of speed and predictable pricing is tempting.

Rate Details

The borrowing rate is spelled out in the contract, which helps eliminate the surprise pricing that can come with other debt. Some insurers also credit interest or dividends in a way that softens the net cost, depending on policy design. Still, the loan is not free money; it is a claim against the policy’s value.

No Schedule

Another feature that sounds helpful is the lack of a strict repayment schedule. Payments can often be made at any pace, or not at all. Flexibility, however, can become a trap. When there is no monthly due date, it’s easy to postpone payments until the balance grows large enough to threaten the policy’s stability.

Benefit Shrink

Unpaid principal typically reduces the death benefit. If the insured person dies with a loan outstanding, the insurer usually subtracts the balance and any unpaid interest from the payout to beneficiaries. Loans can also interfere with long-range goals, such as using cash value later for supplemental retirement income, unless repayment is planned early.

Interest Snowball

Interest is the bigger danger. If interest isn’t paid, it is often added to the loan balance, causing the debt to compound. A $10,000 loan at 5% can become $10,500 after one year, then $11,025 after the next. Dividends may offset some costs, but they may not keep up forever. Tony Steuer, insurance educator, states, “If you let that policy loan ride for 30 or 40 years, it can accumulate a lot of interest that’s not taxed.”

Lapse Risk

As the loan grows, the policy can reach a tipping point. Dividends and remaining cash value may no longer cover premiums and loan interest. If the value supporting the policy is depleted, coverage can end. That outcome can erase the reason the policy was purchased, leaving no death benefit and no ongoing tax-advantaged buildup.

Tax Surprise

A policy ending with an outstanding loan can also trigger taxable income. When coverage terminates, the insurer may treat the borrowed amount and unpaid interest as distributions. Any amount above the premiums paid into the policy can be taxed as ordinary income. That can be painful because the tax bill may arrive without new cash arriving.

Planned Lapse

In some situations, a planned exit is intentional: borrow, use the cash for a specific goal, and accept that taxes may be due if the policy ends. This makes sense with careful planning and liquidity to handle the tax impact. A smart step is requesting an in-force illustration to model how long the policy can carry the loan.

Safer Steps

For those who must borrow, guardrails matter. Borrow less than the maximum, keep premiums current, and aim to at least pay annual interest so compounding doesn’t accelerate. Track the loan balance and ask the insurer how dividends are applied. If finances improve, repay principal to restore the policy’s long-term role and protect beneficiaries.

Other Options

Before using a policy loan, compare alternatives that may be cheaper or safer. Introductory 0% credit offers, a home equity line of credit, negotiating payment plans, or using a true emergency fund may reduce long-term damage. Retirement accounts often carry penalties or lost growth when tapped, so preserving them can be wise.

Conclusion

A whole life loan can be a useful tool when handled with discipline: understand the rate, control the balance, and prevent interest from piling up. Without a plan, it can shrink benefits, end coverage, and create a tax surprise. The safest approach is to decide, in advance, how interest will be handled and what conditions will trigger full repayment.