How Does A Loan On A Life Insurance Policy Work? 
The way policy loans work vary by product and company but the basic idea is that you can borrow from an asset you own . If you own a permanent -LRB- cash value -RRB- life insurance policy , policy loans should be possible once it accumulates enough cash surrender value . Each policy contains provisions which explain how policy loans can function for that particular contract . You can ask your agent or the insurance company directly for the loanable value of the policy . Unlike most conventional loans however , repayment is actually not required . If the loan is not repaid prior to the death of the insured , the amount will simply be subtracted from the policy , reducing the death benefit . Taking a policy loan is not the same as withdrawing cash values . The insurance company will charge you interest on the money you receive from the loan . In most policies , dividends are not paid -LRB- or the interest rate credited is reduced -RRB- on the amount of the cash value impaired by a loan . In other words , there is usually a material net cost of borrowing which will add drag to the policy over the years . Usually , policy owners call up the insurance company , request a policy loan and do not repay it or the loan interest over time . In this case , the interest will be added to the loan , and loan will continue to accrue interest at an even greater rate . If the loan exceeds the cash value , the policy will eventually lapse . Whats worse , any gain -LRB- gross cash value minus premiums paid -RRB- becomes taxable income . Obviously , this should be avoided , so it is especially important to work with your life insurance professional to manage your policy carefully . Note that interest rates and loan provisions vary widely for policy loans : recent product innovations through loans have become quite complex . Since some policies are better than others for taking policy loans , your life insurance professional can help identify the best way to proceed whether analyzing a policy with an existing loan or planning the purchase of a new policy with the idea of taking policy loans in the future e.g. to supplement a retirement plan . 