A life insurance policy loan is a loan from the insurance carrier that uses the cash value of a permanent life insurance policy as collateral. Policy loans are a unique financial tool because they do not require a credit check, application approval, or repayment schedule — you can borrow up to a percentage of your cash value (typically 90%) at any time, for any purpose, without explaining the reason.
The mechanics are straightforward: you request a loan from the carrier (usually a simple form or phone call), the carrier advances the funds, and interest begins accruing on the loan balance at a rate specified in the policy contract (typically 5% to 8% for fixed-rate loans). The loan is secured by your cash value, not by your personal credit. Some whole life policies offer a net-zero loan feature where dividends (not guaranteed) offset the loan interest.
Critically, while policy loans are tax-free when taken, they reduce the net death benefit dollar-for-dollar. If you borrow ,000, your beneficiaries would receive the death benefit minus ,000 (plus any accrued interest). If the total loan balance ever exceeds the cash value, the policy will lapse — and if there is a gain, that gain becomes taxable income.
Policy loans do not need to be repaid on any schedule — they can remain outstanding indefinitely as long as the cash value exceeds the loan balance. However, unpaid interest is added to the loan balance (capitalized), which can cause the balance to grow over time. Prudent loan management is essential to maintaining the policy's integrity. A licensed agent in our network can help you understand the policy loan provisions in your specific policy.