Glossary

Policy loan interest

What an insurer charges on money borrowed against a policy's cash value, at a fixed or variable rate, and added to the loan balance if left unpaid.

Also called: loan interest, policy loan rate

Policy loan interest is the cost of borrowing from your insurer with your permanent policy's cash value as collateral. The rate is set in the contract and is either fixed, often between 5% and 8%, or variable, adjusted periodically under state laws that let rates follow a published index such as Moody's corporate bond yield average.

Unpaid interest is typically added to the loan balance each year, so the debt compounds. Meanwhile the borrowed cash value keeps earning something: some policies credit a lower rate on loaned values, and on direct recognition whole life, dividends on the loaned portion may change. Say, hypothetically, you borrow $30,000 at 6% and pay nothing for 10 years: the balance grows to about $53,700.

The danger is a balance that outgrows the cash value. When that happens the policy can lapse, and any loan amount above your cost basis may become taxable income in the year of lapse, even though you receive no cash. Paying at least the interest each year keeps the balance from snowballing. Model scenarios with the policy loan calculator, and see life insurance policy loans: how they work and what they risk and how cash value is taxed: withdrawals, loans and surrenders.

Last reviewed October 4, 2026

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Related terms

Policy loan Money borrowed from an insurer using a permanent policy's cash value as collateral, with no credit check and no required repayment schedule. Cash value The savings component that builds inside whole life, universal life and other permanent policies, which the owner can borrow against or withdraw. Lapse The end of coverage because a premium went unpaid past the grace period or, in universal life, because cash value could no longer cover the charges. Cash surrender value What a permanent policy pays the owner on cancellation: the accumulated savings minus surrender charges and any outstanding loans. Policy dividend A non-guaranteed annual payment a participating whole life policy may receive when the insurer's mortality, investment and expense results beat its assumptions. Cost basis For life insurance and annuities, the after-tax money put in (premiums minus tax-free amounts taken out), which sets how much of a payout is taxed.

Related guides

Automatic premium loans An automatic premium loan pays missed premiums from your cash value. How it works, what it costs, and the lapse and tax risks of leaving it running. Infinite banking with whole life: how it works and the catch How the infinite banking concept uses an overfunded whole life policy and policy loans, what supporters claim, and the costs, limits and risks critics raise. Life insurance policy loans: how they work and what they risk How a loan against cash value works, what it costs, how it is taxed, and how an unpaid loan can cut the death benefit or lapse the policy. Using life insurance for retirement income How policy loans and withdrawals can supply retirement income, the tax and MEC rules, lapse risk and costs, and who this strategy suits and who should skip it. Overloan protection riders: how they prevent a taxable lapse An overloan protection rider keeps a heavily borrowed policy from lapsing into a tax bill. How it works, section 7702 limits, conditions and trade-offs. Whole life cash value: how it grows and how to use it How whole life cash value builds, why it starts slowly, and how loans, withdrawals and surrender work, with the tax rules and effect on the death benefit.

Related tools

Policy loan calculator Projects how a life insurance policy loan grows, how it cuts the death benefit, and the year it could overtake the policy's cash value.