A policy loan doesn't come with a monthly bill or a due date. That's part of what makes it useful, and part of what makes it easy to lose track of. The carrier isn't chasing you for a payment. But the loan is still growing, and it's growing against a ceiling.
Here's the mechanic. When you take a loan against the policy, the carrier is lending you money and holding the cash value as collateral. If you never pay it back, interest keeps accruing on the balance every year, and that unpaid interest gets added to the loan itself. So even if you never touch the policy again, the balance still climbs.
The ceiling is the cash value, or more precisely the net cash surrender value, which means the cash value minus any surrender charges still in the early years of the policy. As long as the loan balance stays under that number, the policy holds. If the loan balance ever catches up to it, the carrier doesn't have enough collateral left to cover what it lent you, and the policy is at risk of lapsing.
A lapse with a loan outstanding is worse than an ordinary lapse. The loan itself was never taxable, it's a loan. But if the policy lapses while you still owe more than you put in, the IRS treats the excess as a taxable gain, all at once, in the year it lapses. People call this phantom income, because there's no check arriving to pay the tax bill with. You're taxed on money you already spent years ago.
So the real question isn't whether you can borrow against the policy. It's whether you're watching the gap between the loan and the cash value as it narrows.
A few things narrow it faster than people expect. Borrowing again before the first loan is paid down. A stretch of low or zero index credits, if it's an IUL, while the loan interest keeps accruing regardless. Missing a premium payment, since a smaller cash value base means less room under the ceiling. Any one of these on its own is manageable. Two or three at once, over several years, is how a policy ends up close to the edge without anyone noticing.
Carriers build in a warning system for this. Most send a notice once the loan balance passes a set percentage of the cash value, and some policies carry a rider designed specifically to keep an old policy from lapsing under an overloan, sometimes by locking the loan rate and stopping the lapse mechanism once the loan reaches a certain point. Ask whether yours has one, before you need it, not after.
What actually keeps the gap from closing is simple, even if it takes discipline. Pay real cash toward the loan when you can, instead of letting it ride. Check the ratio at every policy anniversary review, the same day you're already looking at the illustration. And if you're managing more than one loan against the same policy over the years, keep a loan ledger so you're working from the real number instead of a guess.
I'm a licensed insurance broker, not a CPA or an attorney, and phantom income from a lapsed policy is a real tax event, not a theoretical one. If a loan balance is getting close to the cash value on your statement, call the carrier and ask for the exact ratio and what triggers a notice, then decide from there whether to add premium, pay down principal, or both.