What "when ready payment before maturity" means

A policy loan or surrender lets you access money from your insurance policy before the date it's scheduled to end. These are two different routes with different costs and timelines.

A policy loan borrows against the cash value your policy has built up — you keep the policy in force and repay what you borrowed. A surrender means you end the policy and receive whatever cash value remains after any surrender charges. Neither requires you to wait until maturity, but both have real financial consequences you need to understand before choosing.

Key Takeaways

  • A policy loan lets you borrow against your policy's cash value and keep the policy active, but you pay interest on the borrowed amount.
  • Surrendering a policy ends it permanently and gives you the remaining cash value, minus any surrender charges that may explore in early years.
  • Policy loans typically take a few business days to process, while surrenders can take one to two weeks depending on your insurer.
  • Borrowed money from a policy loan is not taxed, but surrendering a policy may trigger taxes on gains above what you paid in premiums.
  • If you die before repaying a policy loan, the unpaid balance reduces the death benefit your beneficiaries receive.

How a policy loan works

When you take a policy loan, you're borrowing money from your own policy's cash value — the amount your insurer holds based on premiums you've paid and growth over time. You don't lose the policy. The insurer lends you the money at an interest rate set in your policy contract, usually between 5 and 8 percent depending on the policy type and when it was issued.

You can borrow up to a certain percentage of your cash value, often 90 percent, but not the full amount. The insurer keeps the remainder as security. You repay the loan on whatever schedule you choose — there's no fixed monthly payment required, though interest keeps accruing on the unpaid balance. If you never repay it, the loan amount and accumulated interest are subtracted from the death benefit when you die, or from the final payout if the policy matures.

The money itself is not taxed as income because it's a loan, not a withdrawal. However, if the policy lapses while you have an outstanding loan, the forgiven loan amount may become taxable income in that year.

How a policy surrender works

Surrendering a policy means you're ending it and asking the insurer to send you the cash value that has accumulated. This is permanent — once you surrender, you no longer have life insurance coverage under that policy. The insurer will send you a check for the remaining cash value after deducting any surrender charges.

Surrender charges are fees the insurer deducts if you end the policy in early years. A policy issued 10 years ago may have no surrender charge, but one issued 2 years ago might have a charge equal to 5 to 10 percent of the cash value. The exact charge depends on your policy contract and how long you've held it. Your insurer can tell you the current surrender charge by looking at your policy details.

Unlike a policy loan, the money you receive from a surrender may be taxable. If your cash value is higher than the total premiums you paid in, the difference is taxable gain. For example, if you paid $50,000 in premiums and your cash value is $65,000, you may owe income tax on the $15,000 gain. Your insurer will send you a form showing the taxable portion.

Policy loans versus surrender: which costs less

A policy loan costs you interest on the borrowed amount, but you keep the policy and its death benefit. If you borrow $10,000 at 6 percent interest and repay it in five years, you'll pay roughly $1,600 in interest. However, your policy remains active and your beneficiaries still receive the full death benefit when you die.

A surrender costs you the surrender charge (if applicable) and potentially taxes on gains, but you pay no ongoing interest. If your policy has a 7 percent surrender charge on a $65,000 cash value, you lose $4,550 when ready. You also lose all future death benefit protection. The choice depends on whether you need the policy to stay in force — if you do, a loan is usually better; if you don't, a surrender may be simpler.

How long it takes to receive the money

A policy loan is faster. Most insurers process a loan request within three to five business days once they receive your signed request. Some allow you to request a loan online or by phone and receive the money within a week. The insurer transfers funds directly to your bank account.

A policy surrender takes longer because the insurer must calculate the exact cash value, deduct any surrender charges, determine the taxable portion, and prepare tax forms. This typically takes one to two weeks from the date you submit your signed surrender request. During that time, your policy remains active, so you still have coverage.

What happens to your death benefit

If you take a policy loan and die before repaying it, your beneficiaries receive the death benefit minus the unpaid loan balance and any accumulated interest. If you borrowed $20,000 and the death benefit is $100,000, your beneficiaries receive $80,000 (minus any accrued interest on the loan). This can significantly reduce what your family receives.

If you surrender the policy, there is no death benefit at all — the policy no longer exists. Your beneficiaries receive nothing from that policy. This is why surrender is a permanent decision that affects your family's protection.

Alternatives if you need cash but want to keep coverage

If a policy loan feels risky because of the interest cost, or if your cash value is too low to borrow against, you have other options. Some policies allow a partial surrender, where you withdraw part of the cash value and keep the policy in force with a reduced death benefit. This avoids interest but does reduce your coverage.

You can also explore whether your policy allows a withdrawal rather than a loan — some newer policies distinguish between the two, with withdrawals taken tax-free up to the amount of premiums paid. Check your policy document or call your insurer to ask what options are available on your specific policy.

Frequently Asked Questions

Can I take a policy loan if my cash value is very small?

Most insurers require a minimum cash value before allowing a loan, often $1,000 or more. If your cash value is below that threshold, you cannot borrow. A surrender is still possible, though you may receive very little after surrender charges.

What happens if I take a loan and stop paying premiums?

If your policy lapses due to unpaid premiums, the outstanding loan and accrued interest are deducted from any remaining cash value. If the loan balance exceeds the cash value, you may owe the difference as taxable income. Contact your insurer when ready if you cannot pay premiums.

Does taking a policy loan affect my credit score?

No. A policy loan does not appear on your credit report because it is not a debt to a third party — you are borrowing from your own policy. It will not affect your credit score or credit history.

Can I change my mind after surrendering a policy?

Once you surrender a policy, it is ended permanently. You cannot reactivate it. If you want coverage again, you would need to explore for a new policy and go through underwriting, which may result in higher premiums based on your current age and health.

Will my beneficiaries know if I took a policy loan?

Your beneficiaries will see the loan deducted from the death benefit when they receive the payout, but they won't know about it beforehand unless you tell them. It's a good idea to discuss any policy loans with your family so they understand what to expect.