Somewhere in many life insurance contracts, usually well past the pages anyone reads, there's a section about policy loans.
It's often mentioned in a sales conversation as a benefit. "And if you ever need money, you can borrow against your policy." It sounds like an emergency fund built into your insurance.
Sometimes it is a useful feature. But it's a loan, and like every loan, it has a cost. Let's read the clause. Wording and terms vary between insurers and products, so treat this as a guide to what to look for, and check your own contract.
Which policies have it
Policy loans generally apply to policies that build a cash value, like many traditional whole life or endowment policies. Pure term insurance usually has no cash value, so there's nothing to borrow against. Investment-linked policies may work differently, often through partial withdrawals rather than loans.
Find in your contract: a section titled something like "Policy Loan" or "Loan Value." If there isn't one, ask whether your policy has this feature at all.
How much you can borrow
Usually a percentage of the policy's cash value, not of the sum assured. In the early years, the cash value may be small, so the loanable amount may be much less than people expect.
Find: the loan value, or the percentage of cash value available. Your annual statement may show it.
The interest
This is the line most people skip. A policy loan charges interest, at a rate the contract states or that the insurer sets.
It's your money in a sense, so why is there interest? Because you're borrowing from the insurer, using your cash value as collateral. The cash value stays in the policy; the loan sits against it.
Find: the interest rate, whether it's fixed or can change, and how often interest is charged.
What happens if you don't pay it back
This is the important part.
Unpaid interest is often added to the loan. The loan grows. And if the total loan and interest grows larger than the cash value, the policy can lapse. The coverage you were relying on can end, sometimes without much warning.
Find: what the contract says happens when the loan plus interest exceeds the cash value.
What happens at claim time
If you die with a loan outstanding, the insurer generally deducts the loan and unpaid interest from what your beneficiaries receive.
So borrowing ₱100,000 against a ₱1,000,000 policy doesn't just cost you interest. If it's never repaid, your family receives less, because the loan comes out first.
Find: the clause describing deductions from the death benefit or maturity value.
Automatic premium loans
Some policies have a related feature: if you miss a premium, the insurer may automatically lend you the premium from your cash value to keep the policy in force.
This can save a policy from lapsing in a bad month. It can also quietly build up a loan you didn't know you had.
Find: whether your policy has an automatic premium loan provision, and whether it's switched on.
When a policy loan makes sense
It can be a reasonable option when:
- You need money for a short time, and you're confident you can repay soon.
- The interest is lower than your alternatives, like a credit card or a lending app.
- You'd otherwise surrender the policy, which might cost you more.
It's a poor choice when it's used for spending you can't repay, or when the loan is left to grow for years.
This week
Find out if your policy has a loan. Not "can I borrow?" but "have I already borrowed?" Automatic premium loans mean some people have a loan without knowing it.
Check your statement or ask your advisor. If there's a loan, find out the balance, the rate, and how it's affecting your coverage.
A policy loan is a tool. It's only a problem when it's a tool you forgot you were using.
