Budgets and Money

Understanding Life Insurance Policy Loans

There are important things you need to know about the impact of borrowing against the cash value of your life insurance policy in order to avoid jeopardizing the welfare of your beneficiaries.

Life Insurance Policy Loans: What You Need to Know

Thinking about borrowing against the cash value in your life insurance policy? Here are a few things you need to know before and after taking out a policy loan.

In addition to the death benefit, your permanent* life insurance1 (whole life, universal life, variable universal life) can build cash value that you can borrow against. While you can take out a policy loan for just about any reason, it's best to reserve policy loans for unexpected emergencies or for special needs such as educational expenses.

But before taking out a policy loan, consider the following information to help you understand what you should know before and after borrowing against your life insurance policy.

What you need to know about policy loans

When you take out a loan against your life insurance policy, it's important to understand what can happen if you don't repay your loan. A policy loan is just like any other type of loan in that until it is repaid, interest will accrue; and if the interest is not paid, it will be added to your loan balance, increasing the amount you owe.

What you need to know is that if you were to die before the loan's outstanding principal and accrued interest are paid, the amount will be deducted from the death benefit of your life insurance policy. For this reason, be cautious about borrowing too heavily against your policy because you could be jeopardizing the very reason for purchasing insurance in the first place - the security and welfare of your beneficiaries. Furthermore, there are potential tax implications should your policy terminate with an outstanding loan.

Before taking out a loan

It's always a good idea to speak with your financial advisor or insurance professional when considering a policy loan. A professional can better advise you as to the financial impact a policy loan can have on your policy, as well as other options that may be available to you. For example, they can weigh your immediate financial need against the potential future impact of loan interest accumulation and a reduced death benefit. If you do take out a loan, ask to see a policy illustration that can show the current impact of your loan on your policy's death benefit.

Be a responsible borrower

Policy loans do not come with a repayment schedule and are not required to be repaid. This means that you may elect to repay some, all, or none of the loan. However, it's best to always keep track of your loan and unpaid loan interest accumulation. If you are unable to repay your loan, talk to your financial advisor or call your insurance professional to discuss your options.

Here are some additional tips when taking out a policy loan:

  • Monitor your loan balance regularly in comparison to your cash value.

  • Formulate a disciplined loan repayment plan and make regular scheduled payments.

  • Pay the interest on the loan every year to prevent your loan balance from increasing.

The ability to take loans on your policy is a valuable feature of permanent life insurance. Just be sure that your short-term needs don't jeopardize your family's financial protection.

*As long as required premium payments are timely made.

1. Variable Universal Life cash values are likely to fluctuate due to their investment in stock and/or bond markets.

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Life Insurance Loans

With some life insurance policies there may some additional advantages. One of those advantages is life insurance loans. In this article you will learn what you need to know about policy loans, what to do before taking out a loan and how to be a responsible borrower. For more information, visit our learning center.


All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

Learning Center articles may describe services and financial products not offered by Protective Life or its subsidiaries. Descriptions of financial products contained in Learning Center articles are not intended to represent those offered by Protective Life or its subsidiaries.

Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax-related decisions. For information about Protective Life and its products and services, visit www.protective.com.

Companies and organizations linked from Learning Center articles have no affiliation with Protective Life or its subsidiaries.

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