Policy Loan

A policy loan is a loan made by the insurance company to the policyholder using the cash value of the policy as collateral. Unlike a bank loan, there is no credit check, no approval process, and no mandatory repayment schedule — the policyholder may repay on any schedule or not at all. Interest accrues on the outstanding balance at a rate specified in the policy contract. Unpaid interest is typically added to the loan balance. If the loan plus accrued interest grows to equal or exceed the cash value, the policy may lapse, potentially triggering a taxable event. Policy loans reduce the death benefit by the outstanding loan balance. As long as the policy remains in force, loan proceeds are not subject to income tax.