Policy loan interest is the charge an insurance company applies to the outstanding balance of a policy loan under a permanent life insurance contract. The interest rate may be fixed or variable and is specified in the policy or annual policy notices. Loan interest typically accrued annually and, if unpaid, is added to the loan principal, causing the balance to compound over time. In whole life policies, the interaction between loan interest, dividend credits, and direct or non-direct recognition can materially affect long-term cash value performance. In universal life designs, loan interest can outpace credited interest if not monitored, gradually eroding policy values. Understanding when interest is billed, how it is calculated, and what happens if it is not paid is critical to preventing policy lapse and unintended tax consequences for the policyowner.

In servicing, advisors often review policy loan interest during annual policy reviews or when clients request new loans or income streams. They explain that choosing to pay interest out-of-pocket versus allowing it to accrue can dramatically change projections. Many carriers send annual loan interest notices, and some allow clients to set up automatic bank drafts for interest-only payments. Advanced case design may compare different loan provisions across carriers, including wash loans, preferred loans, and variable loan rate structures. When a policy has a large outstanding balance, advisors use in-force illustrations to stress test how rising loan rates or lower credited rates affect duration. Clear communication about policy loan interest helps clients use cash value strategically without unintentionally driving the contract toward lapse.