While policy loans from your whole life cash value do not have a fixed repayment schedule, it is generally advisable to repay them over time.
If you choose not to repay a policy loan, there may be consequences that can impact your policy’s performance and financial benefits.
Here’s what can happen if you don’t repay policy loans:
Reduced cash value: The outstanding policy loan balance will reduce the available cash value in your policy. As a result, the amount you can access for future financial needs or emergencies will be lower.
Reduced death benefit: The outstanding policy loan balance will also reduce the death benefit payable to your beneficiaries. If the policy loan is not repaid, your beneficiaries will receive a smaller death benefit when you pass away.
Loan interest: Policy loans accrue interest, which is typically added to the outstanding loan balance. If you don’t repay the loan, the interest will continue to accumulate, further increasing the loan balance and reducing your policy’s cash value and death benefit.
Risk of policy lapse: If the policy loan balance, including interest, exceeds the policy’s cash value, your policy may lapse, resulting in a loss of coverage. A policy lapse can also trigger taxes if the outstanding loan balance is considered taxable income.
Potential tax consequences: If you surrender or lapse your policy with an outstanding policy loan, the loan balance, including any gains above your cost basis, could be considered taxable income. This can result in an unexpected tax liability.
While repaying policy loans is not mandatory, it is generally recommended to maintain the benefits and performance of your whole life insurance policy.
By repaying policy loans, you can preserve your policy’s cash value, death benefit, and overall financial benefits.
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