Loan Provision (Policy Loan)

The loan provision in a permanent life insurance policy allows the policyholder to borrow against the accumulated cash value without a credit check, income verification, or mandatory repayment schedule. The insurer charges interest on the loan — typically at a fixed or variable rate disclosed in the policy — and the outstanding loan balance (plus interest) reduces the death benefit if not repaid before the insured's death. Unlike bank loans, policy loans are not income-taxable as long as the policy remains in force. However, if the policy lapses or is surrendered while a loan is outstanding, the loan balance may become taxable income. Policy loans are a flexible source of supplemental income or emergency funds.