A policy loan is an advance made by a life insurance company to a policyowner using the policy's cash value as collateral. Permanent life insurance contracts such as whole life, universal life, indexed universal life, and variable universal life typically allow the owner to borrow up to a stated percentage of the available cash surrender value. The policy continues to earn interest or dividends according to contract terms while the loan accrues interest at a declared fixed or variable rate. There is usually no credit check, set repayment schedule, or underwriting, but unpaid loan balances and accrued interest reduce both cash value and death benefit. If the loan grows too large relative to cash value, the policy can lapse, potentially triggering taxable income for the owner if the contract is not a MEC. Understanding how loans interact with guarantees, riders, and projections is critical to long-term policy performance.

In practice, advisors present policy loans as a flexible source of liquidity for business needs, college funding, emergencies, or supplemental retirement income. Clients appreciate access to funds without traditional loan underwriting, but they need clear explanations that policy loans are not free and must be managed carefully. Producers often use in-force illustrations to model different loan amounts, interest assumptions, and repayment strategies so clients can see the impact on long-term death benefit and cash value. Many agencies flag heavily loaned policies for periodic review, especially in older universal life blocks where changes in interest rates or cost of insurance may erode values. Well-managed policy loans can enhance planning flexibility; poorly managed loans can create surprise lapses, lost coverage, and unhappy beneficiaries at claim time.