Policy loan calculator

How to use it

Take the figures from your policy or its latest annual statement.

1. Enter the death benefit and the current cash value.
2. Enter the loan balance. Include any new loan you are considering.
3. Enter the loan interest rate in your policy.
4. Enter the yearly growth you expect in the cash value, net of charges. Your in-force illustration is the best source.
5. Enter any dollars you will pay toward the loan each year. Leave it at zero if you will pay nothing.

How the math works

The projection runs for 40 years. Each year:

• Loan balance = previous balance × (1 + loan rate) − your yearly payment, never below zero.
• Cash value = previous cash value × (1 + growth rate).
• Net death benefit = death benefit − loan balance, never below zero.

The tool reports the first year the loan balance is at least as large as the cash value, and shows loan, cash value and net death benefit every five years. A payment equal to the yearly interest holds the loan flat. A larger payment shrinks it. This is how policy loan interest works when it is not paid: it is added to the balance.

Hypothetical example, using the tool's starting values: a $250,000 death benefit, $60,000 of cash value growing 4%, and a $30,000 loan at 6% with no payments. After 20 years the loan is about $96,000 and the cash value about $131,000, leaving a net death benefit near $154,000. The loan overtakes the cash value in year 37. Those numbers describe the example only.

What it assumes

• The loan rate and the growth rate stay level for 40 years. Real crediting and loan rates change.
• Growth applies to the whole cash value, including the part backing the loan. The tool's help text warns that growth may be lower on the borrowed portion, so enter a lower rate if your policy works that way.
• The death benefit stays constant. The tool does not model a death benefit that changes with the cash value.
• Loan interest compounds once a year, and your payment is made after the interest is added.
• Premiums, fees and dividends are not modeled separately. Growth "net of charges" is meant to cover them.

Where it stops being right

• When the loan reaches the cash value the policy can lapse. As the tool warns, if the policy lapses with a loan outstanding, any gain above the premiums you paid can be taxed as income. The how cash value is taxed: withdrawals, loans and surrenders guide and a tax professional can say how that applies to you.
• Some policies have features that change the picture, such as an overloan protection riders: how they prevent a taxable lapse, automatic premium loans or a modified endowment contract. See modified endowment contracts and the 7-pay test.
• If the starting loan already exceeds the cash value, the tool shows year 1 as the crossover.
• The estimate is only as good as the rates you enter. Ask the insurer for an in-force illustration that includes the loan.

The life insurance policy loans: how they work and what they risk guide explains how loans work in more detail, and why universal life policies lapse, and how to prevent it covers what happens when cash value runs out. For deciding whether to keep, cash out or sell a policy, use the keep, surrender or sell your policy?.