How Do Policy Loans Work?

Financial emergencies happen to all of us.  Life will throw things at us that we truly are not prepared for and we have to find a way to get through them.  When such times come upon us, we may start looking for help in places many would not think of.  Relatives we have not spoken to in years and side jobs that never before caught our eye may start to seem like viable options, but often there is one we often do not consider.

Life insurance policy.

If you have a life insurance policy, you may or may not have heard of a policy loan.  It might have been mentioned in the policy paperwork and was briefly discussed with your agent.   However, most policy owners are not very familiar with what a policy loan is, and even less how it works.  Let’s go through some of the basics to help get you started.

To understand how a policy loan works, we first need to understand accumulation values.  Permanent life insurance policies (either whole life or universal life) have a cash component to them: as your policy matures with you making your premium payments, the balance in this cash value account begins to increase.  When this starts and how quickly it grows depends on your policy, so I would recommend checking your policy contract for more information on that.

As the value in this account grows, you can then take out a policy loan, borrowing against the accumulated cash value.  You can contact your insurance company, and after going through their specified procedure, they will send you a check with the amount that you have requested.  This can be a perfect scenario for when you need a loan quickly, or all other loan options seem to have significantly higher interest rates.

What about paying back the loan?  The truth of it is you usually are not required to.  That being said, it is typically a very good idea.  Just like any other loan, the amount begins accumulating interest over time.  If the insured on the policy passes away while there is still a balance on the loan, then that amount is taken from the death benefit getting paid out.  With the interest kicking in, this can be a huge cut of the payout.

Really, I would recommend taking out a policy loan only in the following situations:

  • When you can’t qualify for a typical loan and need funds desperately or quickly
  • You can’t afford your policy payments (you can use the policy loan payout to pay premiums instead of letting your policy lapse)
  • It is your last/best option

If your need isn’t too urgent or you have other options available, I would consider those first.  While having a policy loan available to you is wonderful, you do not want to run the risk of losing some of the death benefit when you really need it if you don’t pay the loan back.

Hopefully this helps you to understand more about what policy loans are and how they work.  This was definitely a brief overview, so if you have further questions, I would encourage you to contact us at 1-855-478-4037 or online at for more information.

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