Question

37. In what circumstances would financial advisors recommend a life insurance policy gifting program to their clients?

46. How do policy loans in a life insurance policy work?

47. List the essential elements of a legally enforceable insurance contract.

48. Describe some key elements concerning insurance company investments (types of investment and risk)

Answer 1

46 .

A policy loan is issued by an insurance company and uses the cash value of a person's life insurance policy as collateral. Sometimes it is are referred to as a “life insurance loan.” Traditionally, policy loans were issued at a very low

interest rate, but that is no longer universally true.

A Policy Loan Works :

If someone needs access to emergency cash, getting a policy loan, which accesses the cash value of a life insurance policy, is one option, but only if the policy is permanent life insurance, available as either whole life or universal life. Unlike term life insurance, which does not accumulate cash value, universal and whole life insurance have a cash component, especially later on. During the early years of the policy the premium mostly goes to funding the indemnity benefit, but the cash value continues to increase as the policy matures.

As cash value builds in a whole life policy, policy holders can borrow against the accumulated funds and receive their money tax free. However, as insurers usually can’t say how fast or how much cash value will increase, it’s hard to say when a whole life policy cash value would be available for a loan, although it is generally accepted that at least 10 years must pass before a policy loan is an option. Insurers also have varying requirements on how much cash value must accumulate before a policy is eligible and what percentage of the cash value can be loaned. In a policy loan, you’re not actually withdrawing the cash value. It’s simply being used as collateral on the loan.