Policy Loan
A loan taken from the cash value of a permanent life insurance policy, using the policy itself as collateral. The policyholder borrows against their own accumulated cash value and can repay the loan on flexible terms.
Example
“When Sarah needed $15,000 for home repairs, she took a policy loan against her whole life insurance rather than applying for a bank loan.”
Memory Tip
Think 'borrow from yourself' - you're taking a loan from your own policy's saved-up cash value.
Why It Matters
Policy loans offer a way to access funds without credit checks or lengthy approval processes, and the interest paid goes back into your policy. However, unpaid loans reduce the death benefit and can cause the policy to lapse if the total debt exceeds the cash value.
Common Misconception
Many people think policy loans are 'free money' or don't need to be repaid. While repayment terms are flexible, unpaid loans with accumulated interest are deducted from the death benefit, potentially leaving beneficiaries with much less than expected.
In Practice
John has a whole life policy with $50,000 in cash value and takes a $20,000 policy loan at 5% interest. If he doesn't repay the loan, after 10 years the debt grows to approximately $32,578 with compound interest. When John dies, his beneficiaries receive $167,422 instead of the original $200,000 death benefit ($200,000 - $32,578 = $167,422).
Etymology
The term combines 'policy' from Greek 'politeia' meaning administration, and 'loan' from Old Norse 'lán' meaning something lent.
Common Misspellings
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Related Terms
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See Also
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