What does a policy loan typically require?

A policy loan typically requires repayment with interest, which is crucial for understanding how these loans function within life insurance policies. When a policyholder takes out a loan against the cash value of their life insurance, they are borrowing money from the insurer based on the accumulated cash value of the policy. Since this is a loan, it is not a free withdrawal; it needs to be paid back over time, typically with interest accruing on the unpaid balance. This ensures that the insurer maintains its financial stability while also allowing policyholders accessibility to liquidity when needed.

This aspect emphasizes the financial responsibility the policyholder takes on when opting for a loan, as failure to repay the loan with interest could result in a reduction of the death benefit or other consequences. Knowing this is essential for anyone considering taking out a policy loan, as it underscores the importance of managing the loan repayment properly to avoid adverse effects on their insurance coverage.