What Is a Policy Loan? – How Does a Policy Loan Work?

What Is a Policy Loan? There are different types of loans that a person can take most of them are personal loans however today we are taking a look at a very different type of loan.

What Is a Policy Loan?

Have you ever wondered if you can take a loan against your own life insurance policy? If you have, then you are on the right article. Today will be taking a look at what a personal loan is and how you can apply it in your situation.

The first thing that comes to most people’s minds once they have an insurance policy is if they can borrow money from it especially if it is a life insurance policy. In today’s article I’m going to show you everything you need to know about a Policy loan,  we are also going to take a look at the pros and cons of a policy loan and more on this article today.

What Is a Policy Loan?

The definition of a policy loan is simple it is basically any type of loan that you can take against your life insurance policy if you have one. Once you have a life insurance policy you can simply decide to take a loan against it if you are tight for cash however the value of the loan is only equal to the cash value you have in your insurance policy.

This is one of the most common ways people use in getting money if they are in need of cash. A life insurance policy is a good thing it ensures that your family is well taken care of in case of your death. It basically ensures that your family is paid benefits when you die so that they can carry on living their life just as you intend for them to do.

How Does a Policy Loan Work?

A policy loan is almost the same as a personal loan which means that after taking a policy loan you simply need to pay back with interest. However, a policy loan is different from a personal or any other type of loan because it is taken against your life insurance policy. This means that if you do not have a life insurance policy you cannot get a policy loan.

After taking a policy loan and you are not able to pay it back before your passing away the amount of the loan will be deducted from the benefits to be paid to your beneficiary. Also, keep in mind that you can only borrow money from a permanent life insurance policy. With a permanent life insurance policy you generate or earn money over time by the insurance company investing it.

What are the Pros and Cons of a Life Insurance Loan

In taking out a life insurance loan there are certain pros and cons that are associated with it. Just like a normal loan have disadvantages and advantages a policy loan has disadvantages and advantages as well. Below I have listed and explained some of the disadvantages and advantages of a policy loan for you to see.


  • No credit check – When you take out a policy loan there is no credit check necessary this is because the insurance company uses your cash as collateral. Before taking out a policy loan you must have already paid your premiums to the amount you want to take out so there is no credit check required or necessary. This is usually beneficial when you are in a tight spot and in desperate need of cash.
  • No approval process – When getting a policy loan you do not go through the necessary approval process online when getting a personal or a private loan. Again the reason for this is that you are borrowing against your own cash or assets. You can make use of the funds from the loan any way you like.
  • policy loans and non-taxable – Another advantage that the policy loan provides is the fact that the money from this type of loan is not taxable as long as it is equal to or less than the insurance premium that you have paid. This means that you will not have to worry about paying taxes from the money you are already paid in your life insurance.


  • death benefits reduction – Taking a policy loan will lead to death benefit reduction if you do not pay back the loan before you die. What this means is that the insurance company will simply deduct the amount you borrowed from the benefit to be paid to a beneficiary to repay the loan you took.
  • Lapse In policy – This is when the amount you owe and the interest that accrue becomes much larger than the amount that you initially thought. This can basically cause your insurance policy to relax if you did not have enough cash to pay back the balance and the interest.

When can you take out a Policy Loan?

You cannot just wake up a day after getting your life insurance policy and decide to take a loan against it this is because it does not have enough value yet. You can only take a loan against your life insurance policy if it has accumulated enough value to equal the amount of the loan you want to take. For this to happen you need to keep paying your insurance premiums.

Why is interest charged on a policy loan?

Just as I have mentioned in this article a policy loan is almost the same as a normal loan however this loan is taken against a life insurance policy of the holder. For you to take a policy loan you need to have life insurance and the interest rate charged is usually more competitive than a normal loan. This is why most people tend to go for this type of loan when in a tight spot.

What is a Whole life Policy loan?

A whole life policy loan is an advance of money that you could receive from the policy either through a surrender of the policy or the payment of the death benefit. It can also be described as the money that you are the beneficiary who would have received if the policyholder has passed away.

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