A Commercial Loan Against Your Life Insurance
One alternative for getting money from a life insurance policy is to obtain a loan from a bank or other institution. There are no banks we know of that offer loans secured by life insurance policies directly. However, the following companies make loans against life insurance policies (if you learn of additional companies, please let us know by e mail to Survivorship A to Z)
Like any loan, money you get from a commercial loan is tax free.
At your death, proceeds from the policy will be used to first repay the debt, including fees and interest. If there is a difference between that amount and the death benefit, iw will go to your beneficiary.
When considering a commercial loan agreement for a loan against your life insurance policy, look at:
The interest rate.
How much is the interest? Although the loan is secured, because it involves the uncertainty of a life expectancy, the rate will likely be closer to the rate on a credit card instead of the rate applied to a loan secured by collateral such as a dwelling.
Does the amount of interest change if a standard such as the prime rate changes?
Does interest compound? Interest compounds when you owe interest on unpaid interest. For instance, if you $100 interest from last year, this year you will owe interest on the $100 in addition to the $100 (plus the principal amount of the debt plus the current interest).
Look for fees that you will have to pay. For example, does the company charge:
- An "Application fee" -- a fee to review your application.
- An "Origination fee" -- a fee to start the process.
- A "Termination fee" -- a fee if you pay off the line of credit.
What is the maximum amount you can borrow against your policy? Is the loan one-shot, or is it structured as a line of credit?
With a line of credit you can borrow more money as you need it, with no additional fees or paper work.
If the arrangement is a line of credit, the financial soundness of the lender becomes important. A right to borrow doesn't help if the lender won't have the funds available when you need them - or even be in business.
You will have encumbered your life insurance policy. At the least, things will be difficult if the lender goes bankrupt or totally out of business.
Who continues to pay the premiums?
Do you, or does the lender? If the lender, what is the arrangement, including what interest will you owe on the premium payments?
Is there a "Maturity Date" - a date by which the loan has to be repaid?
Payments are due by the borrower on the Maturity Date.
Watch for whether payments may be due earlier than the Maturity date if the borrower defaults or goes into bankruptcy, or the borrower dies.
As a general matter, no additional loans will be made to a borrower after the Maturity Date.
Do you assign title to the policy to the lender? (In other words, does the lender become the owner of the policy?)
There could be a collateral assignment which basically means that there is a lien against the policy, but you still own it.
Alternatively, the agreement may provide that there is a full assignment of ownership, including the right to obtain the cash value, to exercise any options contained in the policy, and even to turn in the policy and receive the surrender value.
What happens if you die while the loan is still outstanding?
Expect that the lender will be authorized to file a claim with the insurance company. There may even be wording to the effect that the insurance company is authorized to recognize the claim without investigating the reason for the action taken by the lender or the validity or the amount of the liabilities.
Is the lender authorized to settle and compromise any and all claims with respect to the policy which permits the lender to settle for an amount equal to what is owed under the loan?
A provision like this is not unusual, and not likely to come into play. However, if it does, a provision like this can wipe out the interest of any beneficiary you care about.
What law governs the contract?
Generally expect that a commercial lender's agreement will state that the governing law is the law of the lender's state.
Does the lender have the right to assign the contract?
If so, are there any restrictions on when the lender can assign the contract or to whom?
If so, and if you are concerned about confidentiality, you may not know who the ultimate owner of your life insurance policy will be. Perhaps you could at least add that the assignee (the person or company to whom the contract is signed) will be subject to a confidentiality agreement about you and your medical condition.
Does your beneficiary have a right to request an accounting?
If you die, and your beneficiary receives money, it is preferable for your beneficiary to receive an accounting to see how the difference between your outstanding debt and the death benefit are divided between the lender and beneficiary.
If the lender keeps the right to assign the contract without limitation, you, the borrower, may never know the identity of the company or person who will actually collect the death proceeds and who should provide the accounting as well as distribute the remaining funds to your named beneficiary.
Is the lender subject to regulatory supervision?
A regulatory body gives you and your beneficiary an avenue to help resolve disputes without the expense of going to court.
What is the company's reputation?
Check with the local Better Business Bureau and the national Better Business Bureau. See: http:// www.BBB.org
Ask your national disease specific non-profit organization if it has any experience or knows of anyone who has had experience with the company.
What does your financial or legal advisor think?
Because of the complexity of some of the above issues, it is advisable to discuss the situation with an attorney and have an attorney review the papers, or at least have a similar discussion with a financial advisor, before entering into an agreement with a commercial lender.