One of the most valuable features of a life insurance policy is the ability to borrow from your policy's cash value. However, taking out a policy loan can have a significant impact on your policy's performance and future dividends. Also, any outstanding loan balance and interest will reduce proceeds paid to your beneficiary. Talk to your Northwestern Mutual Financial Network Representative before making any decisions.
If you have a policy that is dated after Dec. 31, 1981, or that has been amended to direct recognition, a loan may reduce the annual dividends you receive on your policy. Direct Recognition is the process Northwestern Mutual uses to determine the dividends that are paid on a whole life policy. It factors in the amount of loan activity on the policy in order to fairly distribute the company's surplus to all policyholders.
Applying for a Loan
To apply for a policy loan of more than $100,000, you'll need to complete a Policy Loan Agreement form. To obtain a copy of the form, ask your Financial Representative or call Northwestern Mutual at 1-800-388-8123, from 7:00 AM to 7:00 PM CST.
To apply for a loan of $100,000 or less, contact your Financial Representative or call Northwestern Mutual at 1-800-388-8123, from 7:00 AM to 7:00 PM CST. Please have your policy number ready when you call.
How Interest Affects Your Policy
Interest on your loan accrues daily and is billed annually until the loan is repaid. Unpaid interest is added to principal where it continues to accrue and compound. This may result in the loan exceeding the cash value of your policy. If this happens, outside funds will be needed to avoid termination and a potentially significant tax.
How Loans Affect Certain Policy Types
- Variable Life and Variable CompLife policies—Taking a loan from a Variable Life or a Variable CompLife will permanently affect your policy, even if you repay the loan in full. That's because the cash value used as collateral for your loan will be placed in the company's general account and will not share in the investment experience of the underlying funds.
- Policies Classified as Modified Endowment Contracts—Loans and loan interest are taxable when taken as ordinary income to the extent of the gain in the policy. Northwestern Mutual is required by the Internal Revenue Service (IRS) to report either the amount you borrow or the gain in the contract, whichever is less. If you are under age 59 1/2 when you take the loan, the IRS may assess an additional 10 percent penalty on the taxable amount. Modified Endowment Contracts may be subject to other special tax treatment. Talk with your tax consultant before making your decision.
Repaying Policy Loans
Repaying your loan is important. It keeps your policy in force and maintains the level of protection you planned to provide for your beneficiaries. Repayment can restore your policy's death benefit and cash value, and may increase dividend performance. As you pay off your loan, you will also reduce your interest payments—a lower balance means lower annual interest charges.
To repay a policy loan, contact your Financial Representative, or call Northwestern Mutual at 1-800-388-8123 from 7:00 AM to 7:00 PM CST. If you prefer, a Request for Service form may be completed on line. Payments may be sent to Northwestern Mutual, PO Box 88245, Milwaukee, WI 53288-0245. To ensure proper crediting of your payment, please write your policy number(s) on your payment.
You can repay your loan in installments, in a lump sum, or with your scheduled bills.
- Installments—You choose the amount and the frequency of the payment.
- Lump-sum payment—You repay the loan all at once.
- Scheduled bill payments—If you pay your premium through an Insurance Service Account, we can add your loan payments to your bill monthly, quarterly or every six months. Payments can be as little as $10 a month.