In traditional loans, a repayment schedule outlines the fixed timeline and amounts due until the debt is fully paid. But in the world of life insurance—particularly with policies that accumulate cash value like Indexed Universal Life (IUL)—repayment schedules are far more flexible, if they even exist at all.
This flexibility can be both a benefit and a risk. Without a required repayment schedule, policyholders may enjoy unparalleled financial freedom, but they also face the risk of policy lapse, reduced death benefits, or tax consequences if policy loans go unmanaged.
In this article, we’ll explore how repayment works for life insurance policy loans, when to create a personal repayment schedule, and how to balance flexibility with long-term policy health.
What Is a Policy Loan?
Permanent life insurance policies like IUL allow you to borrow against the accumulated cash value. These are known as policy loans and offer unique advantages over traditional borrowing:
- No credit check or income verification
- Tax-free loans if the policy remains in force
- No repayment schedule mandated by the insurer
Unlike bank loans, insurers don’t demand monthly repayments. But the loan balance does accrue interest, and it reduces your death benefit until repaid.
Does Life Insurance Require a Repayment Schedule?
In short: No. Life insurance companies do not impose repayment schedules on policy loans. The loan is secured by your policy’s cash value, and repayment is entirely optional—until it isn’t.
There are two times when repayment becomes crucial:
- When the loan balance grows close to your cash value
- When you want to restore the full death benefit for your beneficiaries
This is why many policyholders choose to create their own informal repayment schedule to stay on track and prevent unwanted policy consequences.
Why Create a Repayment Schedule for Policy Loans?
Even though insurers don’t require it, having a repayment schedule helps:
- Prevent policy lapse: Unpaid loans that grow too large can consume the cash value and cause the policy to lapse
- Minimize interest costs: Policy loan interest accrues annually—paying early reduces total expense
- Preserve death benefit: Restoring the death benefit ensures full protection for your beneficiaries
- Avoid taxable events: If the policy lapses with a loan, the amount borrowed may become taxable
A structured repayment plan ensures you retain all the advantages of life insurance while minimizing financial risk.
How to Structure a Repayment Schedule
Here are several ways to build your own repayment schedule:
1. Fixed-Term Schedule
Similar to a traditional loan. Decide on a time frame (e.g., 5 years) and divide the balance + interest accordingly. Example: $10,000 loan + $500 annual interest = $2,100 per year for 5 years.
2. Income-Based Repayment
Repay based on your income or cash flow. Allocate a set percentage (e.g., 5%) of monthly income toward loan repayment.
3. Event-Based Repayment
Repay after expected income events—bonuses, tax refunds, asset sales, etc. This works well for self-employed or variable-income individuals.
4. Annual Review Schedule
Set a yearly calendar reminder to assess policy performance, cash value, and outstanding loan. Adjust repayment based on financial health.
How Does IUL Performance Affect Loan Repayment?
In an Indexed Universal Life policy, the cash value is tied to the performance of a market index. If your policy is performing well, you may:
- Let the cash value cover the accruing loan interest
- Delay repayment if the returns exceed the interest rate
- Use policy growth to pay off the loan later (sometimes called loan recycling)
However, if the market underperforms or the loan balance grows too large, a repayment schedule becomes crucial to avoid eroding your cash value.
What Happens If You Don’t Repay?
While repayment is technically optional, here’s what can happen if you ignore it:
- The loan balance continues to grow with interest
- If it exceeds your policy’s cash value, your policy lapses
- You may owe income tax on the outstanding loan balance
- Your death benefit is reduced by the unpaid balance
In retirement planning, this can be devastating—turning a tax-free strategy into a taxable liability. Planning ahead avoids these risks.
Should You Always Repay Policy Loans?
Not necessarily. There are strategic scenarios where policyholders choose not to repay:
- Using IUL as a source of tax-free retirement income
- Expecting the loan to be deducted from the death benefit
- Managing the loan with strong policy performance
But even in these cases, regular reviews are essential. A repayment schedule provides flexibility without sacrificing discipline.
Flexibility with Responsibility
Life insurance policy loans give you unmatched access to liquidity with no required repayment schedule. But with that freedom comes the responsibility to manage loans carefully.
By setting up a personal repayment schedule, you can preserve your death benefit, avoid policy lapses, and maintain the tax-advantaged power of cash value life insurance. In financial planning, freedom is most valuable when it’s paired with foresight.
Smart Tip: If you’ve borrowed against your life insurance, schedule an annual policy review with your advisor to assess whether your repayment plan still fits your financial goals.