Life Insurance Basics
Do You Have to Pay Back a Policy Loan?
There is no mandatory repayment schedule on a policy loan, but interest keeps accruing, unpaid balances reduce the death benefit, and large loans can lapse the policy.
Transcript
Do you have to pay back a policy loan? Technically, you're not required to pay back a policy loan on a permanent life insurance policy, and some strategies like tax-free retirement don't call for paying back loans. However, if you don't pay back a loan, the loan and interest will reduce your death benefit. Policy loans are usually non-recourse to you, meaning the insurance company's only collateral is your policy's cash value and death benefit. There's no fixed repayment schedule and no traditional collection process if you never pay it back. However, interest does keep accruing, and the loan balance grows over time. If the total loan plus interest approaches the cash value, the policy can lapse, potentially triggering taxes and permanently ending the coverage. So for this reason, it's generally wise to treat policy loans as real debt and pay them back on schedule.
Three takeaways. One, there's usually no mandatory repayment schedule, but interest keeps accruing and increases the loan balance. Two, any outstanding loan plus interest is deducted from the death benefit and cash value, and large loans can cause the policy to lapse. Three, best practice is to create your own repayment plan and act like a bank to protect the policy and preserve long-term benefits.
If you're looking for related glossary links, you can check out policy loan, cash value, loan interest, policy lapse, and modified endowment contract. Thanks for watching.
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