Insurance policy loans
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.
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.
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.