Policy Loan and Withdrawal Provisions

Question 1

Permanent Life allows for Cash Value Loans

List 9 characteristics of cash value loans.

Answer 1

All permanent life insurance policies allow policyowners to borrow an amount up to the cash surrender value in their policies.

1. policy must be in force for specified time before insured can take out a cash value loan, typically 3 years.
2. insured can usually borrow entire cash surrender value less any prior debt
3. uses the cash value as collateral. but borrows from insurers primary account not affecting cash value earnings.
4. while the outstanding loan balance accrues interest, the cash value continues to earn interest.
5. policyowner is not required to repay a cash value loan
6. the loan rate is typically one percentage point higher than the rate credited to the cash value
7. this low net rate explains the popularity of cash value loans for “living benefits” purposes.
8. if the insured dies, the death benefit is reduced dollar-for-dollar by the outstanding loan balance.
9. if the loan amount plus accrued interest ever exceeds the cash value, then the policy is canceled.

Variable life insurance policies limit policy loans to a lesser percentage of the cash value (typically 75 to 90 percent). This reflects the variable nature of the cash value and reduces the possibility of the unpaid loan being greater than the policy’s cash value in a falling investment market.

Question 2

What is an APL - Automatic Premium Loan Provision and why is it used?

Name 2 characteristics.

What 2 limits can insurers add?

Answer 2

An automatic premium loan (APL) is an optional provision that directs the insurer to create a cash value loan to pay premiums due at the end of a policy’s grace period; to avoid lapse.

• there is no charge for this benefit.
• requires a policy’s cash value to be at least as great as the unpaid premium

Insurers can add other limits to the APL provision, such as

• the APL cannot pay consecutive premiums and
• no more than 12 monthly premiums can be paid in this way

Question 3

Withdrawals are only available through what type of life insurance?

Traditional life allows cash access via what 2 options?

List 7 Universal Life withdrawal facts.

Answer 3

Owners of traditional whole life policies can access their cash values only through…

1. policy loans, or through full or partial policy
2. surrenders

Universal life insurance policies allow withdrawals, rather than loans from their cash values.

1. Withdrawals of any amount are permitted as long as they are less than the current cash value
2. The UL policy continues in force as long as the remaining cash value supports the monthly deductions
3. Withdrawals are not loans and they DO NOT incur interest charges
4. A withdrawal reduces the cash value and death benefit by the amount of the withdrawal.
5. Unlike a policy loan, the policyowner cannot repay a withdrawal
6. Any attempt to repay is treated as a premium payment that is subject to premium expense charges
7. insurers usually require that all withdrawals exceed a specified minimum amount (for example, $250).

Question 4

Partial Surrenders

How are the cash values and death benefits affected in a UL wthdrawal verses a partial surrender?

Answer 4

Some types of permanent (non-UL) policies allow partial surrenders.

• a partial surrender is the actual surrendering of a portion of the policy.
• The death benefit is reduced proportionately by the amount of the surrender.

This contrasts with the UL death benefit reduction that is equal, dollar-for-dollar, to the amount of the UL cash value withdrawal.

If a whole life insurance policy is partially surrendered, future premiums are also reduced to reflect the remaining smaller death benefit.

For example, suppose Ned’s adjustable life insurance policy has a face amount of $100,000 and a cash surrender value of $30,000. Ned takes $15,000 from the policy’s cash value through a partial surrender. This equals half of the policy’s cash value amount. Because the reduction in death benefit is proportional to the amount of the surrender, the policy’s face must also be reduced by half. So, to partially surrender the policy, Ned must reduce the policy’s face amount from $100,000 to $50,000.