2 Mar 2020
Unlocking the Benefits of Cash Value in Life Insurance
Author: Bruce Parker, President - Global Life
Read time: 4 minutes, 9 seconds
One of the most overlooked, least understood benefits of PALIG’s permanent life insurance products is their cash value—specifically with regards to policy loans.
As a result, one of our 2020 initiatives will be to “unlock” this extremely valuable benefit, both by enhancing our sales and educational initiatives and by ramping up our administrative resources to support greater loan activity.
The ability to take a policy loan offers remarkable financial control and flexibility to PALIG policyholders. The loan vehicle itself offers multiple advantages that one would be hard-pressed to find elsewhere.
Of course, policy loans have consequences, too—and it is our responsibility to make sure our policyholders understand them fully before initiating one.
In the new year, we envision leverage this compelling benefit more fully as we pursue our 2020 goals. In the meantime, as you discuss PALIG’s permanent life insurance with your prospects and clients, please give this important feature the attention it deserves.
The Advantages of Policy Loans
When people are considering permanent life insurance, obviously their primary goal is to protect their loved ones in the future. However, a very strong secondary benefit is the growing, accessible cash value that they can use during their lifetime, particularly through policy loans.
When explaining policy loans to prospects and clients, be sure to note that:
- Policy loans give policyholders quick, easy access to their funds, which remain liquid and in their control
- Policyholders can take a loan (or loans) for any reason
- The policy’s cash value continues to grow at the guaranteed rate (more about that below)
- Policyholders have complete flexibility in terms of how—or even if—they repay their loan
- PALIG processes loan requests in just a few business days
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.
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.