LIFE AND HEALTH INSURANCE
Policy Loan Provisions
One of the most important secondary benefits of a life insurance contract is the policy loan provision. The insured may, at any time, obtain a loan from the insurancecompany, usually equal to the full amount of the cash surrender value, using the policy as collateral for the loan. The loan provision is subject to a delay clause similar to that previously discussed in connection with the cash surrender value and under which the companymay delay making the loan for up to six months. As in the case of surrender, the option of delay is rarely exercised.
The loan will bear interest at some percentage stipulated in the policy (5 or 6 percent in older policies but up to 8 percent in newer contracts), or the loan may be subject to a variable rate. During the 1970s, insurers experienced significant disintermediation as policyholders took cash value out of their life insurance policies to invest it elsewhere at higher rates.3 Because life insurance rates explicitly consider the investment income that will be earned on prepaid premiums, the lower earnings realized on policy loans create da subsidy from 1nonborrowers to borrowers. In an effort to address this problem, the NAIC adopted a new Model Policy Loan Interest Rate Law in December 1980, which permits variable-interest-rate One of the most important secondary benefits of a life insurance contract is the policy loan provision. The insured may, at any time, obtain a loan from the insurancecompany, usually equal to the full amount of the cash surrender value, using the policy as collateral for the loan. The loan provision is subject to a delay clause similar to that previously discussed in connection with the cash surrender value and under which the companymay delay making the loan for up to six months. As in the case of surrender, the option of delay is rarely exercised.
