Paying Back a Life Insurance Loan

How a Life Insurance Loan Is Repaid

A life insurance loan is a borrowing facility against the cash value of a whole or universal life policy. The loan principal and accrued interest are due whenever the policyholder chooses to repay, or automatically when the policy lapses or is surrendered. Policyholders can repay the loan in full, in installments, or by withdrawing cash value; any unpaid balance reduces the death benefit and cash value.

Interest Accumulation and Repayment Options

Interest on the loan accrues daily at the rate set by the insurer, typically 5–8% per annum. The policyholder may pay interest as it accrues or defer payment; deferred interest compounds, increasing the total debt. Repayment can be:

• Full repayment of principal and interest.
• Partial repayment of interest only.
• Regular scheduled payments (monthly, quarterly, yearly).
• Paying off the entire loan when the policy matures or upon death.

Impact on Policy Value

Any outstanding loan balance reduces the death benefit by the same amount. If the policy lapses with a debt, the insurer may write off the policy and the unpaid balance, leaving the beneficiary with nothing. Surrendering a policy with a loan typically returns the cash value minus the loan, potentially resulting in a loss.

Alternatives to Repayment

Policyholders can:

• Transfer the loan to a new policy with a higher cash value.
• Take a loan against a different policy.
• Use external funds to pay the debt and restore the policy's full benefit.