Policy Loan
A Policy Loan is a feature available in certain permanent life insurance policies - such as Universal Life or Whole Life - that allows the policyholder to borrow money from the insurer using the policy's cash value or fund value as collateral. The loan does not require a credit check or external approval because it is secured by the assets already within the policy.
The loan accrues interest, and if not repaid, the outstanding loan balance (including accrued interest) is deducted from the death benefit or cash surrender value when the policy ends or the insured dies.
Key Features of a Policy Loan
Important Considerations
- Taking a policy loan reduces the available cash value and death benefit if not repaid.
- Interest continues to accumulate even if no payments are made.
- If the loan balance exceeds the policy’s fund value, the policy may lapse.
- Loans are generally not taxable as long as the policy remains in force.
Summary
A Policy Loan allows policyholders to access liquidity without surrendering their life insurance policy. While it offers flexible access to funds with no credit qualification, the impact on death benefits and potential tax consequences must be carefully considered. Policy loans are best used with a clear strategy for repayment.
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