Permanent life insurance policies have a face value benefit and also accumulate cash value over time. Owners can access the cash value portion of the policy by signing loan papers. Your death benefit becomes collateral when you borrow cash value funds and the insurance company charges compounded interest until the loan is repaid. Check your life insurance policy for interest rate specifics. Fees accumulate each month until the borrowed amount plus interest are paid in full.
There are dangers to taking out a loan against the cash value of your life insurance policy. The policy could lapse if you do not repay the loan on a timely basis. Or, beneficiaries may receive a reduced death benefit if you pass before the loan is paid back. Both situations jeopardize loved ones' financial security. In addition, there may be tax repercussions if an outstanding loan causes the policy to lapse.