Life insurance is used as collateral for a policy loan. That means: better conditions! Many will not be able to associate much with the concept of a policy loan or policy loan in the beginning. It is also a type of loan that you are not confronted with on a daily basis. To be precise, a policy loan is not even a loan, it is an advance payment that is made.
What exactly is a policy loan?
In order to get a policy loan, various requirements have to be met. So the most significant feature is that the borrower can demonstrate possession of a life insurance policy. To be more precise: this life insurance mustbe a capital life insurance which has already had a certain term and has therefore already been paid up a lot. As a result of these contributions being paid into the life insurance, it has a certain value, the so-called surrender value. This surrender value means that if you canceled the policy, you would receive it as a borrower. The policy loan is prepaid based on this value. The early termination of life insurance would also be a way to get money, but this would be disadvantageous because life insurance would then be completely gone.A policy loan therefore means that life insurance acts as a loan to get a loan.
How does a policy loan work?
The policy loan is a good and worth considering alternative to ordinary loans. Interest rates are not necessarily higher for a policy loan than for other loans, on the contrary: a policy loan often undercuts the conditions of a normal loan. In return, the bank that gives you as a borrower a loan based on life insurance receives good security: your life insurance. For a bank, this means that it can also give borrowers better conditions. Life insurance is retained for you as a borrower. Canceling life insurance to get money should only be the last way to meet your capital needs. With a termination, there is always a certain tax burden on you.
Requirements for a policy loan
Life insurance offers very good security for the bank, but not everyone who has life insurance can apply for a policy loan. A prerequisite for a policy loan is, of course, positive credit record information, as with almost every loan. Your life insurance must also have a certain term behind it so that the surrender value has already reached a certain amount. Another criterion is an open-ended employment contract, as well as regarding life insurance, that it is a capital life insurance and that it only runs for one person. In this respect, life insurance policies cannot be used as a loan for a policy loan, as there is no accumulated capital.