Do you have to pay a life insurance loan back?
Yes, a life insurance loan must be repaid, typically with interest, to keep the policy in force and avoid reduced death benefits or tax consequences.
More from this site
Keep reading the latest coverage
How repayment works
The loan is drawn against the cash value of a permanent life insurance policy. Interest accrues daily, and the insurer expects regular payments or a lump‑sum settlement before the policy matures or the insured dies.
Consequences of non‑payment
If the loan and accrued interest are not repaid, the outstanding balance is deducted from the death benefit, potentially leaving beneficiaries with less than expected. In extreme cases, the policy can lapse, causing loss of coverage and possible tax liabilities on the borrowed amount.
Options for managing the loan
Policyholders can:
- Make scheduled payments to cover interest and principal.
- Allow the loan to compound, understanding the impact on the death benefit.
- Pay off the loan entirely before the policy's surrender value drops below the loan balance.
Key considerations
Before taking a life insurance loan, evaluate the interest rate, the remaining cash value, and your long‑term financial goals. Consulting a financial advisor can clarify whether borrowing against your policy aligns with your overall strategy.