What would happen if I stopped making payments on a loan from my life insurance policy?
UPDATED: Jan 2, 2014
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Asked January 2, 2014
One of the most important benefits of a permanent life insurance policy is that the policy accrues a cash value as you make your premium payments. Cash value is in addition to the face value, or the amount you purchased the policy for, and continues to build until you pass away. You can borrow against the cash value of a life insurance policy without collateral or a credit check, because you are actually making a loan to yourself.
Interest is charged against your life insurance policy loan in the same way it is charged against other types of loans. However, since you are borrowing from your own money, the interest you are charged is not tax deductible the way it is in some loans. Depending on your insurer and the type of policy you are borrowing against, there may also be other fees or cost adjustments.
You do not have to pay back a life insurance policy loan, but the interest against the loan will continue to be charged, and could eventually wipe out the cash value of the policy completely. When the policy is settled after your death, any cash value in the policy will go, first, to paying off the loan and second to paying off the interest. The insurance company cannot deduct money from the actual face value of the policy.
If the loan plus interest meets or exceeds the cash value of the policy, the policy is in danger of being terminated. You will receive a notice from the insurance company that your policy is in arrears and that additional contributions are required in order to keep the policy active. Failure to bring the policy back into a positive balance will result in the policy being canceled and the loss of your insurance coverage.
Answered January 2, 2014 by Anonymous