What is a policy loan?

A policy loan refers specifically to a loan that a policyholder can take out against the cash value accumulated in a life insurance policy. When a life insurance policy has a cash value component—common in whole life and universal life policies—a policyholder can borrow against this amount. This allows the policyholder to access funds without having to cancel the insurance policy or undergo a credit check.

The loan does not necessitate a separate application process or approval, as the policyholder is borrowing their own money. If the loan is not repaid, the outstanding amount, along with any accrued interest, is typically deducted from the death benefit when the insured passes away.

Understanding this definition and its implications is crucial, as it highlights the flexibility life insurance policies can offer to policyholders in a financial crunch. Additionally, recognizing how policy loans work can inform important decisions regarding the management of life insurance and the potential impact on beneficiaries.