An unpaid policy loan against a permanent life insurance policy’s cash value compounds interest just like any other loan, eroding the eventual death benefit.
How it works
The current loan balance compounds at the policy loan interest rate for the years left unpaid. Subtracting that ending balance from the policy’s face amount gives the net death benefit if the loan is never repaid.
What this does not include
This doesn’t model the policy’s cash value growth over the same period — if cash value grows faster than the loan balance, the policy may remain in force; if the loan balance catches up to cash value, the policy risks lapsing, a scenario this calculator’s death-benefit focus doesn’t directly flag.
How to use this calculator
- Enter the current policy loan balance, loan interest rate, years left unpaid, and policy face amount.
Frequently asked questions
Is a policy loan taxable?
Generally not, as long as the policy remains in force — but if the policy lapses or is surrendered with an outstanding loan, the loan amount can become taxable as income to the extent it exceeds the premiums paid.
Why doesn’t a policy loan require credit approval?
Because it’s secured by the policy’s own cash value — the insurer isn’t taking on new credit risk, since the loan is fully collateralized by an asset it already controls.
Can a policy loan be repaid at any time?
Yes — policy loans are typically flexible, with no required repayment schedule, though interest continues to accrue on any unpaid balance regardless.
