Loan from the insurance: building money and policy loan
When it comes to loans, insurance companies are competing with banks – and have been for years. However, this is not about simple installment loans.
The focus is on long-term construction finance. And of course, life insurers are happy to lend to the life insurance policies they have taken out with them. If an insurance company deals with the granting of loans, one often speaks of insurance loans.
However, this is by no means a particularly defined type of loan. Rather, there are three different forms of financing:
Final mortgage loans with redemption surrogates, policy loans, also known as policy loans, and – since the low-interest rate phase triggered by the financial crisis – increasingly also conventional annuity loans for mortgage lending.
Our article explains what the various insurance loans are all about and what are the advantages and risks of taking out a bank loan. With a policy loan, the life insurer pays an advance on the expected insurance benefit.
Strictly speaking, it is not a real loan
The policyholder also receives no third-party money. Rather, only as much is paid out as was previously paid into life insurance. Added to this are the profit shares earned up to that point.
The amount of the policy loan is limited. A percentage of the surrender value is paid out. For traditional life insurance, the percentage is usually 70% to 80%. A policy loan is more difficult to obtain if unit-linked life insurance is to be lent.
If at all, unit-linked life insurance policies are often only credited with approx. 50% of the current value of the underlying securities. The insurance industry is currently moving away from the issue of traditional capital life insurance.
Guarantee interest has gone out of style. Anyone wishing to borrow such modern capital life insurance will probably have to reckon with a percentage of the surrender value that corresponds to the funded capital life insurance.
Policy loans are handled differently
Basically, they are due. In other words, the amount paid out is settled at the end of the life insurance term by being offset against the term benefit. Only interest accrues during the term. Policy loans are usually extremely flexible. Repayment in agreed installments is also possible. Special repayments or even early, complete loan repayment can also be agreed upon.
There are also special features when it comes to paying contributions during the loan term. Policyholders can make the contract non-contributory.
However, it should be noted that this reduces the expiry payment and also the death benefit accordingly. Another option is to continue paying the contributions in addition to the interest on the policy loan. Policy loans are concluded with the insurance company with which life insurance is running.
But there are other options. For example, policyholders can obtain policy loans through the secondary market. In some cases, better conditions can be achieved.
The market leader in Germany is Good Finance. It is a reputable financial service provider.
Another way is the intermediary of a bank. This is more of an indirect policy loan because the bank is the lender, while the life insurance policy is for security. The peculiarity:
The bank itself pays the premiums during the term of the loan. It does this from the loan amount.
As a result, expiry payments and death benefits are fully retained. That is the advantage. The disadvantage, however, is that the entire loan amount is not paid out. The bank keeps part of the loan in order to repay the insurance premiums.
Policy loans: advantages and disadvantages
Policy loans are fairly straightforward, and interest rates are often cheaper than traditional installment loans. Because there is virtually no default risk for the lender. In addition, policy loans are a way of getting a loan despite problems with Credit Checker.
As a rule, poor Credit Checker and low score values do not play a role in lending. Disadvantages arise above all if policyholders decide to set the insurance free of contributions.
The result is negative effects on expiry payments and death protection. Problems can also arise if package solutions have been concluded with other insurance benefits such as accident protection.
If no repayments are made during the term of the policy loan (final loan), the interest payments increase overall compared to normal installment loans.
If the policyholder wishes to continue the contract in addition to the policy loan, the premiums from the life insurance policy apply in addition to the interest.
The policy loan is a general-purpose loan. The use is at the borrower’s discretion. He can take out the loan for normal purchases or co-finance a construction project.