What to consider before taking on a policy loan on your policy
Whenu are in need of quick cash, taking a loan on your life insurance policy can be a good option. It can give you money in a hurry, which can help you pay off your debts or pay for sudden expenses. But before you go ahead with the loan, it’s important to consider the following factors:
Interest rates: You should understand the interest rate on the loan you’re considering and how it compares to other loan options. Insurance policy loans often have lower interest rates than other types of loans, but it’s still important to compare rates to make sure you’re getting a good deal.
Repayment terms: Make sure you understand the repayment terms of the loan. How much time do you have to repay the loan? What happens if you can’t make payments on time?
Impact on the policy: Taking a loan on your insurance policy will reduce the death benefit payable to your beneficiaries, and may also reduce the cash value of the policy. You should consider the impact of this on your overall financial plan and your beneficiaries’ needs.
Alternative options: Before taking a loan on your insurance policy, consider other options for accessing funds, such as a home equity loan, personal loan, or credit card. These options may have higher interest rates, but they may also offer more flexibility in terms of repayment and may not impact your insurance policy.
Types of Insurance Policy Loan
1. Voluntary Policy Loan
A voluntary policy loan is a type of loan that is available to policyholders who have a cash-value life insurance policy. Cash-value life insurance policies, such as whole life or endowment insurance policies, build up a cash value over time as premiums are paid. This cash value can be accessed through a voluntary policy loan.
When a policyholder takes out a voluntary policy loan, they are essentially borrowing money from the cash value of their life insurance policy. The loan is secured by the cash value of the policy, which serves as collateral. The policyholder can use the loan for any purpose they choose, such as paying for unexpected expenses or making a large purchase.
The loan must be repaid with interest, and the interest rate on a voluntary policy loan is typically lower than other types of loans, such as credit cards or personal loans. The policyholder can choose to repay the loan in a lump sum or through regular payments over time.
It’s important to note that if the loan is not repaid, it will reduce the death benefit payable to the policyholder’s beneficiaries. Additionally, if the policyholder passes away before the loan is repaid, the outstanding balance of the loan will be deducted from the death benefit.
Overall, a voluntary policy loan can be a good option for policyholders who need access to funds and have a cash-value life insurance policy. However, it’s important to carefully consider the terms of the loan and the impact it may have on the policy’s cash value and death benefit before taking out a loan.
2. Automatic Policy Loan
An automatic policy loan is a loan that is taken out against the cash value of a life insurance policy without the policyholder having to take any action to initiate the loan. With an automatic policy loan, the policy loan is automatically initiated when the policy’s cash value reaches a certain level, as specified in the policy’s terms and conditions. This takes place automatically if you don’t pay your premium by the end of the policy’s grace period, the insurer may automatically give you a policy loan. Your insurance policy must have enough cash value to qualify for the loan, and in that case, the loan amount will equal the unpaid premium.
The advantage of an automatic policy loan is that it can provide a source of funds for the policyholder without requiring them to take any action or go through a loan application process. However, it’s important to understand the terms and conditions of the automatic policy loan, including the interest rate, repayment terms, and impact on the policy’s cash value and death benefit.
Policyholders should also be aware that an automatic policy loan can reduce the cash value of the policy, which can affect the policy’s ability to earn dividends or provide future benefits. Additionally, if the loan is not repaid, it can reduce the death benefit payable to the policyholder’s beneficiaries.
Where do I apply for a policy loan?
You can apply for a policy loan by contacting your insurance company or agent, or by filling out an online form.
Should I take a loan on my insurance policy or surrender the policy
Deciding whether to take a loan on your insurance policy or surrender depends on your individual financial situation and needs. Here are some factors to consider:
Need for larger amount of cash: If you need cash immediately, surrendering your policy may be a better option than taking a loan. Surrendering your policy can provide you with a lump sum of cash, while taking a loan may only provide you with a portion of the cash value.
Interest rates and repayment terms: Insurance policy loans typically have lower interest rates than other types of loans, such as credit cards or personal loans. However, taking a loan means you’ll need to repay the loan with interest. If you can’t afford to make the loan payments, surrendering your policy may be a better option.
Impact on policy value: Taking a loan on your insurance policy can reduce the cash value and death benefit of the policy. Surrendering your policy will result in the loss of the death benefit and any future benefits that may have been paid out. You should weigh the loss of these benefits against the immediate need for cash.
Long-term financial goals: Consider your long-term financial goals when deciding whether to take a loan or surrender your policy. If you need the policy’s death benefit for your beneficiaries, surrendering the policy may not be the best option. However, if you have other sources of income or insurance coverage, surrendering the policy may make sense.
Overall, the decision to take a loan on your insurance policy or surrender depends on your individual financial needs and goals. If you’re considering surrendering your life insurance policy, we can help. We’ll work with you to sell your policy instead, so you can get back the proceeds of your policy at a higher value than traditionally surrendering it to your insurer. Contact us today to learn more.
Article contributed by CapitaSafe, the leading independent resale insurance provider specialising in the acquisition of life and endowment insurance policies in Singapore.
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