In­sur­ance pol­icy loans

Daily Nation (Barbados) - - The Courts -

THE POT­HOLES IN THE ROAD­WAYS may be cost­ing you the re­place­ment of the shocks on your ve­hi­cle. Not only do you need to re­pair your ve­hi­cle, but pos­si­bly your spouse’s car too. You are look­ing at a $3 000-plus bill from your me­chanic.

It is well be­fore pay­day and also be­fore you have built up a sat­is­fac­tory emer­gency fund. So, what about a loan from the cash sur­ren­der value of your life in­sur­ance pol­icy?

You have been faith­fully pay­ing the monthly pre­mium on this pol­icy for over ten years now. It must be good for sit­u­a­tions like this press­ing need for cash. It is your money, the pay­ments made over the years, that have ac­cu­mu­lated the cash sur­ren­der value that is avail­able.

No ap­proval process

So, you do not need an ap­proval process once you are bor­row­ing within the range of the cur­rent cash sur­ren­der value. No credit checks will be nec­es­sary and you will not need to ver­ify your cur­rent in­come earning level. Fur­ther, you do not even have to say what you need the loan for, and you are not limited in how you can spend the loan funds.

This in­sur­ance pol­icy loan is sound­ing all so easy. Your in­sur­ance agent also ex­plained that once you come into the com­pany with the in­sur­ance pol­icy doc­u­ment and make the ap­pli­ca­tion for the loan, the loan funds can be made avail­able in a day or two. Best of all, there are no monthly re­pay­ment in­stal­ments nec­es­sary. There is no stip­u­lated pay­back date.

With all these ben­e­fits, there is no doubt that an in­sur­ance pol­icy loan can serve as a use­ful, easy to ne­go­ti­ate and quick to ac­cess loan in the case of a fi­nan­cial emer­gency. How­ever, it is im­por­tant to note that the in­ter­est on such a loan tends to be higher than that on a per­sonal loan from a bank or credit union.

Dur­ing the loan pe­riod, the in­ter­est charge is added to the loan bal­ance such that the in­ter­est charges would be com­pounded un­less it is paid an­nu­ally. Un­like a bank or credit union loan, there is no monthly in­stal­ments re­quire­ment. Usu­ally, the pol­i­cy­holder re­ceives an an­nual pol­icy state­ment which typ­i­cally is just set aside and not re­viewed in de­tail.

No ur­gency

What tends to hap­pen is that the pol­i­cy­holder who makes the loan bliss­fully con­tin­ues to pay the monthly pre­mi­ums, but feels no ur­gency to re­pay the loan, or does not pay any of the ac­cu­mu­lat­ing com­pound in­ter­est. The pol­i­cy­holder will then be likely shocked at the sig­nif­i­cant growth in the loan bal­ance over a num­ber of years.

Mon­i­tor

It is there­fore im­por­tant for a pol­i­cy­holder who takes a loan on his pol­icy to mon­i­tor ex­actly how in­ter­est is ac­cu­mu­lated on the loan bal­ance. In ad­di­tion to main­tain­ing the monthly pre­mium pay­ments, the loan in­ter­est should be paid each year in or­der to avoid in­creas­ing the loan bal­ance.

If the loan pe­riod is to be ex­tended, the pol­i­cy­holder should con­sider con­vert­ing to a per­sonal loan at a lower in­ter­est rate and where there is the com­mit­ment to make monthly re­pay­ment in­stal­ments.

It is quite pos­si­ble for the loan bal­ance on an in­sur­ance pol­icy to out­strip the cash sur­ren­der value, nul­li­fy­ing the pol­icy. At that stage, the only way to re­in­state the pol­icy is to re­pay the full loan bal­ance. At that stage, the loan can­not be re­paid in in­stal­ments.

Some pol­i­cy­hold­ers pur­pose­fully stop pay­ing the monthly pre­mi­ums on poli­cies that have ac­cu­mu­lated sig­nif­i­cant cash value. They al­low pol­icy loans to ser­vice the pol­icy, know­ing that the ben­e­fi­cia­ries of the pol­icy will get the net pro­ceeds of the pol­icy – the death ben­e­fit of the pol­icy less the loan bal­ance at the time of death – as a ben­e­fit on their death.

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