Policy Loan

A loan issued by an insurance company that uses the cash value of a person's life insurance policy as collateral.

Sometimes referred to as a "life insurance loan."

Investopedia Says:
Traditionally, these were loans issued at a very low interest rate, but that is no longer universally true. If the borrower fails to repay the loan, the money is withdrawn from the insurance death benefit.

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Amount that the owner of a life insurance policy can borrow at interest from the insurer, up to the cash surrender value. If interest is not paid when due, it is deducted from any remaining cash value. When the cash value is exhausted, the insurance ceases. If the insured dies, any outstanding policy loan and interest due are subtracted from the death benefit.

The policyowner may repay the loan in whole or in part at any time; or may continue the loan, as long as the interest plus the principal of the loan do not equal or exceed the cash value (in essence only the interest on the loan must be serviced) or until the policy matures. Insurance companies reserve the right to delay payment of a policy loan for up to six months to protect their solvency, but this has rarely been done since the Depression of the 1930s. See also Automatic Premium Loan Provision.