Situation: Numerous life insurance strategies involve borrowing against the cash value of a policy. Policy loans can provide a fast and easy source of cash for clients. Often the terms of a policy loan are more favorable than a conventional loan. They do not have the stringent credit and underwriting approval requirements and the interest rates are typically lower. In addition, there are no fixed repayment schedules in that the loan interest can be paid or accrued and can remain outstanding until the insured’s death.
The reason life insurance companies can provide favorable terms on a policy loan is because the carrier controls the cash value that serves as collateral for the loan and it will not allow a policy loan to exceed the cash value of the policy. Consequently, the carrier knows that the funds will be available. If the outstanding loan balance gets too close to the remaining policy cash value the carrier simply “forecloses” on the policy. So, the good news is
that the policy owner can never be on the hook for a loan that is greater than the policy cash value.
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