What is a policy loan in life insurance?

A policy loan in life insurance specifically refers to a loan that a policyholder can take against the cash value of a permanent life insurance policy. Permanent life insurance, such as whole life or universal life, accumulates cash value over time, which the policyholder can borrow against. This loan does not require a credit check, as it is secured by the cash value of the policy itself.

The main appeal of a policy loan is that it allows policyholders to access funds without having to terminate their insurance coverage or sell their policy. The borrowed amount typically accrues interest, and any unpaid balance will be deducted from the death benefit if the policyholder passes away with an outstanding loan. This arrangement provides flexibility and is often used for emergencies, opportunities, or significant expenses without the rigid requirements of traditional loans.