Furthermore, unlike conventional bank loans, policy loans require:

• No credit checks
• No debt-to-income ratio minimum
• No restrictions on how funds may be used
• No fixed repayment schedules  
• No phone calls or letters regarding missed payments

In short, the advantages are substantial.

Common Misconceptions

It appears there are some common misconceptions surrounding policy loans, so be prepared to educate your prospects and clients. These include:

Term Life vs. Permanent Life Insurance

Don’t assume every consumer understands the difference between term and permanent life insurance. Be prepared to explain that unlike term life, PALIG’s whole and universal life products have two components: a death benefit and cash value. Let them know it’s this cash value that makes policy loans possible. 

Where Policy Loan Dollars Come From

The term “policy loan” is itself misleading. Some consumers automatically assume that taking one means dipping into their policy’s cash value. Be prepared to clarify that when PALIG policyholders take out policy loans, they’re actually borrowing from PALIG’s general fund, using their cash value as collateral. It is for this reason that cash values can continue to accrue at their guaranteed rates when there’s an outstanding loan—an important selling point.

It Doesn’t Matter How the Loan Will Be Used

Some consumers have a hard time accepting that, yes, they can use their funds for any purpose, planned or unplanned. They can use it to finance unexpected expenses, pay for college, supplement their retirement, purchase a home or car—there are no restrictions. 

Policyholders Don’t Need to Repay the Loan—But they Should 

There is no requirement to make policy loan repayments, and PALIG does not require a formal repayment structure. However, it’s important to impress on your clients that it’s in their interest to repay their policy loans to keep their life insurance policy intact—and to avoid possible negative consequences. 

Consequences of Outstanding Policy Loans

It’s very important that policyholders understand the consequences of having an outstanding policy loan. These include:

• An outstanding loan balance can lower the amount of dividend credited to the policy.  
• If the loan balance plus interest exceeds the policy’s cash value, the policy could lapse.
• There may be potential tax consequences associated with policy loans, particularly if the policy lapses. In that event, the policy loan balance plus interest may be considered taxable income by the IRS.

Most significantly, an outstanding policy loan will reduce both the cash value and death benefit by the amount of the outstanding loan. It is a dollar-for-dollar reduction. So, if a death claim is paid out, PALIG will reduce the payout by the amount of the loan before it is released, potentially lessening the policy’s original purpose.

The same holds true should a policyholder surrender a policy or use it in a 1035 exchange. For these reasons, we PALIG strongly advises policyholders to repay their policy loans on an expedited basis.

Unlocking the Benefits of Cash Value in 2020

We’ll be sharing more information with you in the future, as we develop a more comprehensive approach to marketing and supporting this important benefit. As you know, PALIG is committed to offering consumers exceptional value and protection, particularly as evidenced by our portfolio of quality whole life and universal life products.

About the Author

Bruce is responsible for all of Pan-American Life’s individual life and personal accident business lines. In this capacity he leads the international life business in Latin America and the Caribbean and serves as the Chief Executive Officer of Mutual Trust Life Insurance Company. Bruce also oversees the Group’s Private Client Life businesses as Chairman of Pan-American International Insurance Corporation (PAIIC) and Pan-American Assurance Company International, Inc. (PAACII). Bruce is the former President, CEO and Chairman of Old Mutual US Life. In that role, he oversaw $19.3 billion in assets and led their retail business strategy development. He led efforts to successfully and strategically target specific demographics, including the affluent and mass market Baby Boomer population, the U.S. Hispanic market and the affluent international markets. Prior to Old Mutual, Bruce was Senior Vice President of Distribution for Jefferson Pilot Financial, where he led the design and implementation of their Premier Partner Strategy, growing revenue by 50 percent in three years. He is a former member of the LIMRA International board of directors and a former Trustee of both The American College Bryn Mawr in Pennsylvania and former Trustee of Mt. Pisgah Christian School in Johns Creek, Georgia. Bruce holds a BA in Economics from the State University of New York at Oswego and an MS in Management from The American College. He also holds a Leadership Certificate from Cornell University. He is also a National Association of Corporate Directors (NACD) Governance Fellow.