In the case of a policy loan, the repurchase value of your own life insurance is used as collateral for the granting of a loan. Colloquially, therefore, the inclusion of a policy loan is also referred to as a life insurance lent.
The policy loan offers some advantages over terminating life insurance and taking out other loans. By using the surrender value as collateral lower interest rates and the absence of the entries are possible in the event of existing insurance protection.
Policy loans are usually final. This means that only interest will be paid during the term. The repayment is to be made at the end of the term in one sum. You should definitely take this into account in your financial planning.
Advantages of policy loans
A major advantage of the policy loan over the sale or termination of a life insurance policy is that the life insurance cover remains in existence despite the loan.
In addition, the surrender value of life insurance is a strong security, which ensures low interest rates and saves you a query. Also, you do not need to provide any additional collateral to obtain a policy loan.
The inclusion of the loan by no means leads to a higher current burden on borrowers. After all, any policy can be made free of charge despite mortgaging – so instead of the insurance contributions interest and repayment installments are paid, so the double burden remains.
The running costs can even be further reduced. Borrowers are free to pay only the interest during the term of the policy loan and to pay the repayment later. In this case, the loan is set off against the expiration of the life insurance.
Are there any processing fees for the policy loan?
The BGH in Karlsruhe had already decided in May 2014 that processing fees for loans should not be charged to consumers. A little later, in July 2017, the BGH reiterated its assessment of whether entrepreneurs should pay these fees.
As a result, neither entrepreneurs nor self-employed individuals nor private individuals need to pay processing fees when borrowing.
Although there is still no detailed judgment on the same question in policy loans, it can be reasonably assumed that it behaves analogously in these cases. After all, there is no significant difference in the nature of the types of loans.
BaFin analyzed the situation on the market and stated in its annual report for 2016 that almost all of the 82 insurance companies surveyed that still had active policy loans at the end of 2014 barely found any processing fees.
Eighty of these institutes either never anchored this fee form in their general terms and conditions or had abolished it long before the BGH decision. Today, German insurers no longer have corresponding clauses, as the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) has determined.
As far as we know, this also applies to all third party policy loan providers. Should, contrary to expectations, a company charge processing fees for a loan
Questions and answers (FAQ)
What does the term “policy loan” mean? Is there a difference to the life insurance loan?
No, both terminology means the same thing, namely to take out a loan in which one’s own life insurance functions as collateral.
Which insurance can be borrowed?
In principle, endowment life insurance policies and unit-linked life insurance policies can be given, provided that they guarantee a certain surrender value and the terms of the policies allow it. Life insurance companies are exempting for such a loan.
Is information necessary for awarding a policy loan?
On March 22, 2016, the new residential real estate credit line came into force, since then, an assessment of the creditworthiness of the applicant must be made. However, the score is irrelevant to the awarding of a policy loan unless the borrower is in the debtor directory and the policy meets all the requirements for a loan.
What requirements must my life insurance fulfill for a loan?
The capital-forming and unit-linked life insurance policies must have a certain minimum surrender value. This varies from provider to provider. Which provider sets which minimum surrender value, you will find in our comparison.
What is the maximum mortgage lending value?
The endowment policies are usually up to 100 percent of the repurchase value as a policy loan possible in unit-linked life insurance significantly less. (Depending on the provider up to 60 percent)
Why are lower interest rates possible than with traditional installment loans?
The life insurance offers a high security. The lender has no fears of payment default but can avail himself of the insurance benefit should the borrower default on his payments.
There are no surcharges for increased probability of default, credit checks or the deposit of collateral. Also, the fact that the loan amount never exceeds the repurchase value of the policy depresses interest rates and thus provides attractive terms.
Which possibilities of repayment are there? How does this affect the rates?
For most providers, you can choose between three types of repayment:
- During the term of the loan, you only pay the interest and pay off in the end.
- They pay off part or even the entire amount during the term of the loan.
- They pay off on a fixed, agreed plan, comparable to an installment loan.
If you choose option 1, you will get very low monthly payments. But even with the other two types of repayment, the monthly burden is not too high. Finally, you can arrange long terms for the installment, since the repayment is guaranteed in a policy loan. This significantly reduces the cost of the loan in any case.
Do you need money at short notice, but do not want to give up your life insurance (eg for old-age provision)? Then the policy loan is a sensible alternative to termination of life insurance.
Lending your life insurance policy allows for lower interest rates than traditional installment loans, and your insurance coverage remains fully in place.
Whether your contract for a policy loan comes into question, you will find in your insurance documents or in personal conversation with an insurance broker or your tax adviser.
In our overview of the different lenders you get an insight into the conditions of the providers. Our comparison should help you in your search for the right policy loan.