Guidance for Life Policy Loan Requests

A policy loan is borrowing against the available cash value of an eligible permanent life insurance policy. The insurer generally uses the policy as security rather than requiring a conventional credit application. Loan availability, interest rates, and terms vary by carrier and policy. Any unpaid balance and accrued interest can reduce cash value and the death benefit available to beneficiaries.

You may be able to borrow if you own a permanent policy with sufficient available cash value. Term life insurance typically does not build cash value and therefore does not offer policy loans. Your carrier determines the amount available, loan interest, and request process. Before borrowing, review an in-force illustration to understand the projected policy impact under different repayment scenarios.

Policy loans generally do not have a fixed monthly repayment schedule like many bank loans, but interest continues to accrue. You may repay all or part of the balance, pay interest, or allow it to remain outstanding. However, an unpaid loan reduces policy value and death benefits. A large loan can contribute to a policy lapse, which may create tax consequences.

Timing depends on the carrier, the policy’s available cash value, and whether the request is complete. Straightforward requests may be processed after the carrier verifies ownership, loan availability, and required forms. Collateral assignments can take longer because lender documentation and policy-assignment records may be involved. Review carrier-specific requirements before relying on funds for a time-sensitive obligation.

Yes. If a loan remains outstanding when the insured dies, the carrier generally deducts the loan balance and accrued interest from the death benefit before paying beneficiaries. This means beneficiaries may receive less than the policy’s stated death benefit. Reviewing the balance regularly and considering a repayment approach can help you preserve more of the intended protection.

If loan interest and withdrawals deplete a policy’s cash value, the policy could lapse without sufficient additional premium or repayment. A lapse ends coverage unless the policy is reinstated under carrier rules. If a policy with gain lapses or is surrendered while a loan is outstanding, the loan may be treated as taxable income. Consult a qualified tax professional promptly.

A permanent life insurance policy may be used in a collateral assignment, where a lender receives a security interest in the policy until a business loan is repaid. The lender’s rights are limited by the assignment terms, and the policy owner usually retains ownership. The carrier, lender, attorney, and CPA should review documentation, repayment obligations, and ownership considerations.

Review your current cash value, available loan amount, interest rate, loan type, and how borrowing could affect premiums, policy performance, and the death benefit. Request an updated in-force illustration from the carrier showing multiple loan and repayment assumptions. If the funds support a business transaction, also review lender requirements and discuss tax or legal implications with the appropriate professionals.