Policy Loan and Withdrawal Provisions

On the test

Living benefit= can withdrawal money from policy for a living purpose, no restrictions -policy loan --preserves the cash value --Not a cash value loan ---insurer lends money; uses cash value as collateral ---Loan can never exceed cash value ---Unpaid balance accrues interest -Partial withdrawal --A withdrawal of some of the cash value from the policy --Reduces life insurance protection- as well as cash value- by amount of withdrawal

Cash Value Loans

All permanent life insurance policies allow policyowners to borrow from the insurer an amount up to the cash surrender value in their policies. Loans against the cash value are normally available after the policy is in force for a specified time, typically three years. Usually the policyowner can borrow the entire cash surrender value less any prior debt against the policy. A cash value loan does not literally draw down the policy's cash value. The policy loan is provided by the insurer, which uses the cash value as collateral. This explains an interesting fact about cash value loans: While the outstanding loan balance accrues interest, the cash value continues earning interest. The interest rate charged by the insurer is usually the lesser of a guaranteed rate stated in the policy or a current rate announced by the company. The loan rate is typically no more than a percentage point higher than the rate credited to the cash value, and many times it is equal. This low net rate explains the popularity of cash value loans for "living benefits" purposes. Although the policyowner is not required to repay a cash value loan, unpaid interest is capitalized (that is, the unpaid interest is added to the outstanding loan balance). In one way or the other, the insurer will recoup the outstanding loan balance (including accrued interest). If the policy is lapsed or surrendered, any cash value proceeds distributed to the policyowner will be net of the loan balance. If the insured dies, the death benefit is reduced dollar-for-dollar by the outstanding loan balance. As long as the total amount of the loan plus interest is not greater than the cash surrender value, the policy remains in effect. If the loan amount plus accrued interest ever exceeds the cash value, then the policy is canceled. Policy loans under traditional whole life insurance plans can be as high as 100 percent of the cash value. This is possible because all policy values are contractually guaranteed, allowing the insurer to calculate precisely the amount that can be borrowed without exceeding the cash value. 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.

Key Points

-The policy loan is provided by the insurer, which uses the cash value as collateral. -In one way or the other, the insurer will recoup the outstanding loan balance (including accrued interest). -If the loan amount plus accrued interest ever exceeds the cash value, then the policy is canceled. -The purpose of the APL is to prevent a policy from lapsing if the policyowner forgets to pay the premium (or simply can't pay it when due). -Universal life insurance policies allow withdrawals, rather than loans,from their cash values. -A withdrawal reduces the universal life insurance policy's cash value and death benefit by the amount of the withdrawal.

Automatic Premium Loan Provision

An automatic premium loan (APL) is an optional provision that a life insurance applicant can elect at the time the policy is purchased. The APL benefit may also be requested after the policy is issued, in which case it is added to the policy as a rider. Either way, there is no charge for this benefit. The APL provision directs the insurer to create a cash value loan to pay premiums due at the end of a policy's grace period. The purpose of the APL is to prevent a policy from lapsing if the policyowner forgets to pay the premium (or simply can't pay it when due). The typical APL provision requires a policy's cash value to be at least as great as the unpaid premium for the automatic premium loan to be made. In addition, 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.

Withdrawals

Owners of traditional whole life policies can access their cash values only through policy loans or through full or partial policy surrenders. By contrast, universal life insurance policies allow withdrawals, rather than loans, from their cash values. The practical result to the policyowner is the same: Money is obtained through the policy for virtually any "living benefit" need. Withdrawals of any amount are permitted as long as they are less than the current cash value. The UL policy continues in force as long as the remaining cash value supports the monthly deductions. Withdrawals are not loans, nor do they incur interest charges. Instead, a withdrawal reduces the universal life insurance policy's cash value and death benefit by the amount of the withdrawal. Unlike a policy loan, the policyowner cannot repay a withdrawal. Any attempt to repay is treated as a premium payment that is subject to premium expense charges. To reduce insurer costs by keeping policyowners from taking small, frequent withdrawals, insurers usually require that all withdrawals exceed a specified minimum amount (for example, $250).

Policy Loan and Withdrawal Provisions

Permanent life insurance cash values not only support the policy's death benefit, they can also be used to provide certain "living benefits." Policyowners obtain these living benefits by accessing policy cash values through policy loans, withdrawals, and partial surrenders. The policyowner is free to use these funds for any purpose.

quizzes

Question 1 If Rick withdraws funds from his universal life insurance policy, what will be the effect on the policy's death benefit? It will not change, as long as Rick repays the amount withdrawn. It will not change as a result of the withdrawal. It will be reduced by the amount of the withdrawal, plus interest *It will be reduced by the amount of the withdrawal. A withdrawal reduces the universal life insurance policy's death benefit by the amount of the withdrawal. Question 2 Which statement regarding loans against life insurance policyowner Bob's cash value is NOT correct? A rate of loan interest as stated in the policy is charged on the outstanding loan amount. *Bob may borrow against his policy's cash value from the moment the policy is issued and at any time thereafter. The loan interest rate may be fixed (at no more than eight percent), or it may be adjustable. Bob can most likely borrow the entire cash surrender value less any prior debt against the policy. Loans against the cash value are normally available after the policy is in force for a specified time, typically three years. Usually the policyowner can borrow the entire cash surrender value less any prior debt against the policy. Question 3 Which statement about life insurance cash value withdrawals from a universal life policy is NOT correct? The policy continues in force as long as the remaining cash value can cover the monthly deductions. A policyowner can withdraw amounts less than the full cash value. Universal life insurance policies allow withdrawals from their cash values. *Universal life insurance policies allow loans and full or partial policy surrenders Universal life insurance policies permit access to cash value only through withdrawals. Question 4 The automatic premium loan (APL) provision does which of the following? provides cash for emergencies and opportunities *prevents a life insurance policy from lapsing if the policyowner fails to pay a premium provides liquidity if the insured wants to increase a policy's face amount improves the policyowner's credit rating The APL's purpose is to prevent a policy from lapsing if the policyowner fails to pay the premium. If elected, the APL provision directs the insurer to deduct an unpaid premium from the cash value of the policy as a loan. Question 1 Under variable life insurance plans, policy loans can be as high as what percent of the cash value? 25 percent 50 to 75 percent *75 to 90 percent 100 percent Loans taken from variable life policies are typically limited to 75 to 90 percent of the cash value. Question 2 Which of the following best describes a partial surrender of a permanent (non-universal) life insurance policy? Under a partial surrender, the death benefit is not affected by the amount of the surrender. A partial surrender is a loan against the policy's cash surrender value. A partial surrender is the same as a cash withdrawal under a universal life insurance policy. *Under a partial surrender, the death benefit is reduced proportionately by the amount of the surrender. The death benefit under a partial surrender is reduced proportionately by the amount of the surrender. Question 3 If a policyowner partially surrenders an adjustable life insurance policy, which of the following happens? The premium stays level. The premium goes down by the amount of the withdrawal. The premium goes up proportionately. *The premium goes down. If a policyowner partially surrenders a policy, the premium goes down. Question 4 Which statement about cash value withdrawals from a universal life insurance policy is NOT correct? *Withdrawals incur interest charges. Insurers do not require policyowners to repay withdrawals. Policyowners can withdraw funds as long as the policy has a cash surrender value. Withdrawals reduce the death benefit dollar-for-dollar. Universal life withdrawals do reduce the death benefit dollar-for-dollar

Partial Surrenders

Some types of permanent (non-UL) policies allow partial surrenders. A partial surrender is similar to a UL policy cash withdrawal, but there are several important differences. Unlike a withdrawal, a partial surrender is the actual surrendering of a portion of the policy. The death benefit under a partial surrender 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. 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. When Ned reduces the policy's face amount by 50 percent, a like percentage of the cash value is freed up. If a whole life insurance policy is partially surrendered, future premiums are also reduced to reflect the remaining smaller death benefit.