There are many reasons people choose policy loans. Life can leave you in the middle of financial hardship at a moment’s notice.
Whole and universal life insurance policies accumulate cash value over time. After ten years, you have enough cash in this asset to consider a loan. Life settlements are an option available to policyholders who are 70+ years old or living with significant health impairments like cancer.
There are pros and cons to policy loans which we will dive into. But first, do they disqualify you from a life settlement?
Policy loans are borrowed from the policy’s death benefit. Insurance companies use this as collateral for the loan. Basically, a loan will lower your insurance policy’s value, but you may be able to still sell it. There are a few factors that influence how policy loans will affect a possible life settlement.
The amount of cash that you can take out with a loan varies between insurance companies. The longer you have a whole life insurance policy, the more cash accumulates within it. Thus giving you the opportunity for a loan.
When you borrow money from your policy, you don’t have to pay the money back. This creates a very unique loan. Technically you will be paying it back, and with interest but the money comes out of your policy and death benefit.
This means your beneficiaries will receive less after your policy loan. Certainly much less after the interest accumulates if you don’t pay the loan back. Ultimately making someone less likely to buy your policy due to the value decreasing.
There are many situations where a loan makes sense. When you need money, you look at all your options for a loan. Other loan options may have higher interest rates than the loan you can get on your policy.
Policy loans are also available quickly. While other loans require a longer application process, a loan on your policy is available right away. Sometimes as soon as a day though it can take up to two weeks depending on the company.
Some people choose to get money from their policy when they need it fast. They may pay the policy loan back using another loan when the funds for that finally come through.
The biggest disadvantage to policy loans is the lack of payment schedule. You may think this sounds perfect, but the consequences can become overwhelming. Now you’re responsible for following through with regular payments to pay the loan back.
If you fail to do this, the interest on the loan will keep draining your death benefit. In some situations, the interest can creep up and take over any value left in the policy. This can cause your policy to lapse. Ultimately taking life settlements off the table.
As you can see, the freedom with repayment on these loans can be more bitter than sweet. That is if you don’t have a strict repayment plan.
Policy loans might be just the ticket you need to get you out of a tricky situation. Luckily, that doesn’t mean you’re disqualified from life settlements. It simply changes how much your life insurance policy is worth.
Every life insurance policy is different. There are a lot of factors that go into determining the value of a policy before selling it. Start with a policy calculator to get an idea. You can then reach out to Windsor and we’ll discuss your situation and the best option available to you.
You don’t need to be sure you want a life settlement before reaching out. Let us help you navigate the decision-making process whether that includes a life settlement or not.
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