Definition of "Policy Loan"

Under an insurance policy, the amount that can be borrowed at a specified rate of interest from the issuing company by the policyholder, who uses the value of the policy as collateral for the loan. In the event the policyholder dies with the debt partially or fully unpaid, the insurance company deducts the amount borrowed, plus any accumulated interest, from the amount payable.

The amount that the owner of a life insurance policy can borrow, at an interest rate set by the company, from the insurer up to the cash surrender value. If interest is not paid when due it is deducted from any remaining cash value. At the death of the policyholder any outstanding policy loans and interest due are subtracted from the death benefit.

A nonforfeiture provision in cash value life insurance policies where the policyowner may borrow from the cash value of the policy. The interest rate that is charged on such a loan is usually significantly lower then borrowing from a bank. Because this loan cannot be turned down by the insurance company, it may be wise to use this type of loan for conditions where other sources of borrowing are no longer available or too costly. If the insured dies before the loan is repaid, the loan plus any interest will be deducted from the death benefit.