What are "premium loans" in the context of life insurance?

Premium loans in the context of life insurance refer specifically to loans taken against the cash value of a life insurance policy to cover unpaid premiums. This is applicable in policies that accumulate cash value, such as whole life or universal life insurance. When a policyholder cannot afford to pay their premiums, they have the option to borrow against the accrued cash value. This borrowed amount is then used to maintain the coverage and keep the policy in force, preventing lapsation due to non-payment.

The significance of this mechanism lies in the fact that it offers policyholders a flexible means to manage their policies, especially in challenging financial times. By utilizing the cash value, they can sustain their insurance coverage without having to liquidate assets or accumulate debt from other sources. This feature empowers the policyholders, providing them with options that can provide peace of mind while still maintaining their life insurance benefits. Additionally, it’s important to understand that any outstanding loans against the cash value will reduce the death benefit and the cash value if not repaid.