Terminology - Policy Loan

Policy Loan

This option may be available on policies that acquire cash value. This allows owners to use the policy as a collateral for a policy loan.

It is actually an advancement of the cash value under the policy owner's policy. Thus, it will reduce the amount payable in event of a claim or if the policy owner chooses to surrender the policy. As interest is payable on the loan, the amount payable will be reduced by the amount of the policy loan plus accrued interest.

An important note about policy loans is that if the policy owner fails to pay the interest due on policy anniversary, the outstanding interest will be added to the principal and later charged at the same rate as that of the principal. If this outstanding amount exceeds the cash value of the policy, the policy will be terminated and all premiums paid will not be refunded.

It is advisable to check for exact terms and conditions with your insurer before embarking on a policy loan.