Policy Loans

A policy loan is a cash advance that an insurance company, such as Northwestern Mutual or MassMutual, issues to the owner of a permanent life insurance policy, using its cash value as collateral. The insurer typically charges interest rates between 5% and 8% annually on policy loans, according to LIMRA’s 2023 report.

Policy loans do not require a credit check because insurers like New York Life secure them directly against accrued policy value, YourInsuranceInfo confirms. Unpaid policy loans plus accumulated interest reduce the death benefit dollar-for-dollar if not repaid before the insured dies; for example, if an outstanding loan is $15,000 and the death benefit is $100,000, beneficiaries receive $85,000.

Borrowers may repay policy loans at any time without mandatory schedules or prepayment penalties, but delayed repayment increases total interest owed. Most whole life and some universal life policies from companies like State Farm and Guardian Life offer access to policy loans once the cash value reaches a minimum threshold, often around $1,000.

Policy loans are not classified as taxable income unless the policy lapses or is surrendered with an outstanding balance exceeding cost basis per IRS rules. Loan limits usually range from 90% to 95% of the accumulated cash value; for instance, MetLife allows up to 90%.

Policyholders keep their coverage in force during a loan provided premium payments remain current. Policy loans accrue compound interest which further reduces both surrender value and death benefits if left unpaid.

Major insurers report that less than 10% of active policies have outstanding loans at any given time (ACLI survey 2022).