What is a Life Insurance Policy Loan?

A life insurance policy owner can borrow from the cash value component of many permanent policies for virtually any purpose. For example, these loans can be used for funding a child or grandchild’s college education, paying off higher interest debt, or supplementing retirement income.

Policy loans enable a policyholder with Permanent Life Insurance to take money from the cash value of a policy dollars that accumulate over time – and even use those funds to cover emergency expenses and unexpected bills.

The policy holder can typically borrow an amount up to the policy’s cash surrender value – minus an adjustment for interest. There will usually be at least some amount of interest that is charged for the loan by the insurance company.

While the interest is not usually actually paid by the policy holder, it is added to the amount of the loan that is was taken out of the cash value component of the policy. There could also be other “adjustments” as well to the insurance contract. For instance, a participating whole life insurance policy could restrict the payment of dividends to the policy holder while the loan is still outstanding.

It is important to note that, even though it is not required that a policy loan be repaid, any amount that is outstanding at the time of the insured’s death will be deducted from the policy’s benefits that are paid out to the beneficiary.

In addition, if the amount of cash that is borrowed, plus interest, does exceed the amount of cash value, the policy could terminate, provided that additional amounts are not paid into the policy in order to keep it in force. With this in mind, life insurance coverage could be lost if the policy were to lapse in this manner, so it is important to be mindful of the amount of cash that is borrowed through such loans.