Definition
Policy Loan
A policy loan is a loan taken against the surrender value of a traditional life insurance policy, using the policy as collateral.
Once a traditional policy has acquired surrender value, the insurer will lend a percentage of that value (commonly up to 80-90%) at an interest rate it sets. The policy continues in force, and the loan plus interest is deducted from any claim or maturity payout if not repaid.
Policy loans are quick and require no separate credit check, since the policy itself secures the debt. ULIPs and most pure-term plans do not offer policy loans. Unpaid interest can erode the policy's value, so borrowers should service the loan to preserve the eventual benefit.
Related terms
- Guaranteed Surrender Value (GSV)Guaranteed Surrender Value is the minimum amount, fixed by regulation, that a traditional life policy must pay if the holder surrenders it after acquiring surrender value.
- Cash ValueCash value is the savings component that builds up inside a permanent or savings-linked life policy, accessible through loans or surrender.
- SurrenderSurrender is the voluntary termination of a life policy by the holder before maturity, in exchange for the surrender value.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.