What happens to the loan balance in a life insurance policy if the interest is not paid?

In a life insurance policy, when a loan is taken against the cash value, interest accrues on that loan balance. If the interest is not paid when due, the amount of unpaid interest does not simply disappear; instead, it gets added to the original loan balance. This means that the overall debt against the policy increases.

Adding the interest to the loan balance can affect the policy in several ways. First, it may lead to a larger overall loan that needs to be repaid, and if the total loan balance approaches the available cash value of the policy, it could risk the policy lapsing if not managed carefully. This process illustrates the importance of keeping up with loan interest payments to maintain the financial integrity of the policy and avoid potential complications in the future.

Understanding this aspect of how life insurance policy loans work helps policyholders make informed decisions about managing their policies effectively.