How a Life‑Insurance Policy Loan Works

Borrowing Basics

A loan against a life‑insurance policy lets you tap the cash value that has built up in a permanent policy, such as whole life or universal life, without filing a claim. You request the loan from the insurer, receive the funds, and the outstanding balance plus interest is deducted from the death benefit or cash value when the policy ends.

Eligibility and Application

Only policies with a cash‑value component qualify; term policies do not. The insurer typically requires the cash value to exceed the loan amount, often allowing up to 90 % of the available cash. To apply, you fill out a loan request form, provide identification, and choose a repayment method (interest‑only or full repayment).

Interest and Costs

Interest rates are set by the insurer and can be fixed or variable, usually lower than credit‑card rates but higher than bank loans. Interest accrues daily and is added to the loan balance if not paid. Some policies charge a small administrative fee for processing the loan.

Repayment Options

You can repay the loan at any time, either in full or partially, and you may choose to pay only the interest to keep the loan from growing. Unpaid interest compounds, increasing the total balance. If the loan is not repaid before death, the insurer deducts the outstanding amount plus accrued interest from the death benefit.

Impact on Policy

Taking a loan reduces the cash value available for future loans or withdrawals and can affect the policy's growth if dividends are calculated on a lower base. Persistent under‑repayment may cause the policy to lapse if the loan balance approaches the total cash value.

Key Considerations

• Only permanent policies with cash value can be used.
• Interest is charged and can compound if unpaid.
• Repayment reduces the death benefit proportionally.
• Excessive borrowing can jeopardize policy continuity.