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What is a Policy Loan?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 June 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Policy loans are loans that are extended by the insurance company to a holder of an life insurance policy. The amount of the loan will depend on the amount of cash value that the policyholder has in the policy itself, and is subject to the terms and conditions of repayment that are part of the insurance contract. An insurance policy loan is an excellent way to secure a small loan for emergencies, and can usually be repaid in terms that are more liberal than loans secured from other sources.

It is important to note that a policy loan is not possible with all types of life insurance policies. For example, many term-life insurance policies do not accrue cash value, so a loan based on cash value is not possible. Even some whole life plans have restrictions on loans against the cash value, with policyholders having to meet specific qualifications before a loan can be issued. For this reason, it is important not to assume that it is possible to obtain a policy loan, simply because you have some type of life insurance coverage currently in effect.

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One of the advantages of a policy loan is that the rate of interest applied to the loan balance is usually very competitive with interest rates offered by banks and other types of creditors. While it is true that the interest will continue to accrue as long as there is an outstanding balance on the loan, many people find they can repay the loan within a short period of time. This helps to prevent the interest from consuming a great deal of the overall cash value of the policy.

Securing a policy loan often involves less red tape than other loan options. This is because the amount you can borrow with this type of loan is limited to the current cash value you have accumulated with the policy itself. In the event that a policyholder should die before the loan is repaid in full, the outstanding balance, along with any applicable interest, is deducted from the amount of the death benefit named in the policy terms. Should circumstances force the policyholder to surrender the policy for any reason, the outstanding balance is deducted from the cash value before any payments are made to the holder.

Many people use a policy loan as a way to generate quick cash to deal with an unanticipated expense. Because the loan usually has a competitive interest rate and can be issued in less time than other loan options, it is possible to secure the funds needed with relative ease, assuming the policyholder meets the criteria set in place by the insurer. Repaying the loan quickly helps to ensure that obtaining a second policy loan at a later date remains an option, as well as helping to make sure that the full cash value of your coverage is available to your beneficiaries in the event of your death.

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