What is a "policy loan"?

A policy loan refers specifically to a loan that a policyholder can take against the cash value of a whole life insurance policy. Whole life insurance policies accumulate cash value over time, and this cash value can be accessed by the policyholder through a loan. The amount that can be borrowed is typically limited to a percentage of the cash value, and interest is charged on the loan amount.

When the policyholder takes out this loan, they do not have to undergo a credit check, and the loan does not need to be repaid within a specific time frame. However, any unpaid loans and interest will be deducted from the death benefit if the policyholder dies while the loan is outstanding. This feature makes policy loans a flexible option for policyholders needing funds without the need to surrender their policy or report traditional loan requirements.

Understanding this concept is crucial because it highlights how policy loans work in the context of whole life insurance and the implications these loans have on the overall policy and its benefits.