What will happen if my life insurance policy value is less than any outstanding loans and interest that I have?

UPDATED: Mar 10, 2014

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Asked March 10, 2014

1 Answer

One of the benefits of a whole or universal life insurance policy is the cash value it accrues. The cash value is like a savings account appended to your life insurance policy, and you are allowed to borrow against the accrued value or reinvest into the policy. However, the money you get is a loan, and must be paid back, including interest. When you loans plus interest due exceed the policy loan value on your life insurance policy, you will be given short period of time to get the financial situation under control.

The insurance company will write you a letter to inform you that the value of the loan now exceeds the policy loan value. Typically, the letter will inform you of the amount of the overage, and request that you make an immediate payment to get the situation corrected. If you send in the requested payment, you policy will be up to date and you will be able to return to making regular, scheduled payments against the loan.

If you have a policy that accrues dividends, the insurance company may advise you that those dividends can be cashed in to bring you policy loan up to current. Even if the dividends are insufficient to cover the full loan overage, they can be used to reduce the amount so that you have a smaller out of pocket cost to keep the policy active.

If you do not make the required loan payments to keep your policy loan value below the amount you owe, your life insurance policy could be in jeopardy. Life insurance companies will try to get you to bring the policy up to current for a short time, but they will eventually be forced to resort to other tactics. Those tactics could involve redirecting a portion of your premiums to cover the policy loan, effectively stopping the cash accumulation until the loan value is within the proper parameters. It could also mean the loss of your life insurance policy if you are not keeping the policy current. Debts against the policy can be considered as expenses owed to the insurance company and your policy could be suspended or revoked if you do not keep the policy loan below the policy loan value.

Answered March 10, 2014 by Anonymous

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