What is a Policy Loan?
A policy loan is a type of loan available to policyholders who have a permanent life insurance policy, such as Whole Life or Indexed Universal Life insurance, that has accumulated cash value. This loan allows the policyholder to borrow against the policy’s cash value, using it as collateral, while the life insurance policy remains active. It provides a quick source of funds without needing to go through the approval process required for traditional loans, and the funds can be used for any purpose, from paying for emergency expenses to covering college tuition.
The loan amount available depends on the cash value that has built up in the policy over time. Unlike other types of loans, a policy loan does not require credit checks or long approval processes, and interest rates tend to be competitive. However, if the policyholder does not repay the loan, it will reduce the death benefit that is ultimately paid to beneficiaries.
Interest accrues on policy loans, and it is important for policyholders to stay current with interest payments to prevent the loan balance from growing over time. If the loan plus interest surpasses the cash value, the policy could lapse, resulting in a loss of both the coverage and the remaining cash value. Many policyholders find policy loans advantageous as they offer flexibility, and the borrowed funds are generally tax-free, provided the policy remains in force.
