What Is a Policy Loan?
A policy loan lets you borrow against the cash value of a permanent life insurance policy, such as whole or universal life. The insurance company acts as the lender, and the loan is secured by the policy's accumulated cash value.
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Step‑by‑Step Process
1. Confirm Your Policy Type
Only permanent policies with a cash‑value component allow loans. Term policies do not.
2. Check Cash Value and Loan Limits
Contact your insurer or log into your online account to see the current cash value. Most insurers allow loans up to 90% of that amount, but the exact limit varies.
3. Submit a Loan Request
You can request a loan online, by phone, or through a written form. Specify the amount and whether you want a fixed or variable interest rate.
4. Receive Funds and Sign Documentation
Once approved, the insurer transfers the loan amount to your bank or checks it out. You'll receive a loan agreement outlining the interest rate, repayment terms, and tax implications.
5. Manage Repayments
Repayments are optional; if you don't pay back, the loan balance plus accrued interest will be deducted from the death benefit or the policy's cash value when the policy matures.
Costs and Impact on Your Policy
Loans accrue interest, typically 4%–7% per year, depending on the insurer and loan type. Unpaid interest compounds, increasing the amount owed. If the loan balance exceeds the cash value, the policy may lapse, terminating coverage and leaving you liable for the full amount.
Tax Considerations
Loan interest is usually not tax‑deductible, and the loan itself is not taxable as long as the policy remains in force. However, if the policy lapses or is surrendered, the loan amount may become taxable income.
Alternatives to Borrowing
Instead of a loan, you might consider a policy withdrawal, which reduces the cash value and death benefit but may be less costly if you need a short‑term sum. Consulting a financial planner can help you decide the best option for your situation.