Understanding Policy Loans: Borrowing from Your Whole Life Cash Value Tax-Free

The ability to take a **policy loan** is one of the most distinctive and advantageous features of Whole Life and other permanent insurance policies. It allows policyholders to access their accumulated cash value without surrendering the policy, providing a source of liquid capital for major financial needs.

The Mechanics of a Policy Loan

When you take a policy loan, you are not actually withdrawing your cash value; you are borrowing money from the insurance company using your cash value as **collateral**. Key aspects include:

• **Tax-Free Access:** Policy loans are typically received tax-free, making them an attractive source of funds compared to liquidating taxable investments.
• **No Required Repayment Schedule:** Unlike bank loans, most life insurance policy loans do not have a mandatory repayment schedule. However, interest does accrue, and the policy can lapse if the loan and accrued interest exceed the cash value.
• **Uninterrupted Growth:** The cash value portion that secures the loan often continues to earn interest or dividends, although the death benefit is reduced by the outstanding loan balance.

Considerations and Risks

While flexible, policy loans must be managed carefully. Any outstanding loan balance and accrued interest will **reduce the final death benefit** paid to your beneficiaries. Therefore, policyholders should aim to repay the loan to maintain the full value of the policy’s death benefit.

Disclaimer: This content is for informational purposes only and is not financial or legal advice. Consult a qualified professional before making any financial decisions.