Borrowing Against a Life Insurance Policy
Because permanent life insurance policies result in the accrual of equity in a savings account, that account becomes an asset that may be used to acquire a loan. Unlike most loans, these are not accompanied by a schedule for repayment, and repayment is actually not required. If the loan is not repaid, the amount will simply be subtracted from the policy, reducing the death benefit. A loan against a life insurance policy is not the same as a withdrawal of funds from the account, and for that reason, the insurance company may charge interest on the money you receive from the loan.
It is usually possible to borrow up to the cash value of the policy. Interest rates vary widely for these loans and unexpected fees may appear during the borrowing process that will add to this baseline rate, so some policies may be more suitable for borrowing than others.
If you are not making sufficiently high payments on the loan to cover interest owed on the money, the interest will be added to the loan, and interest will continue to accrue at an even greater rate. If the cash value of the account is exceeded, the policy will eventually lapse. Obviously, this should be avoided, so it is important to devise a schedule for managing loan repayment on your own if you want to keep the policy and maintain the death benefit for your beneficiaries. The cost of interest on the loan may often be exceeded by the interest earned on the money remaining in the savings account. Applying these dividends to the loan interest can be an effective way to keep the loan balance in check.