Times are bad, your hands are tight and all your savings account don’t seem to generate enough interest for you… How… You may ask…
If you should turn to a local financial institution for a personal loan, the interest may kill you with time, should you be unable to repay them back in time. For the latest personal loan rates, you can go to my trusted site – Qotion.sg for a good reference.
When all seems gloomy with the high interest rate being offered by the financial institutions. You call them “loan sharks and broad daylight robbery!” behind their back and suddenly you remembered you have bought quite a few life insurance policies with cash values. You decide to turn to them…
You can click on this link as provided by Dr. Money for the various insurance companies’ life insurance policy loan rates.
Then you may ask, which many clients have asked me as well… “Why am I paying an interest rate, back to the insurance company, for the loan which happens to be my premiums being put there all this while?” and “What is this Bonus Encashment I hear about?”
So What Is This Policy Loan All About?
If you have bought policies like whole life or endowment plans or what we normally call them as participating policies, like, after 2 or 3 years, there will be a cash value available and this amount will increase with the accumulated years together with the annual bonuses being declared every year. With the accumulation, you will get your break-even year then you start having some “profits” and then maturity or you may choose to surrender.
So with this cash value, you can take a policy loan of up to over 90% of the cash value. This policy loan will then carry a interest rate and it would be best to clear off this loan within 1 or 2 years before it hurts you in your pocket.
Why The Interest Rate?
Though the loan you are taking comes from your premiums on your life insurance policies. So the interest rate makes sense that the insurance company gives this loan to you and expect a small return, for you to settle your short term financial needs, whereas still covering you on what your insurance plan covers you.
Do note that you still need to pay the premiums for the insurance plan that you have taken a loan against.
If you don’t wish to repay the loan and you are less than willing to pay for the insurance premiums, then the automatic premium loan will be kicked in to pay for your insurance premiums from your remaining cash value till two things happen:
- You have enough of everything, and decide to surrender the policy. The final value amount you will be getting back will be less the loan amount (with interest) and less the insurance premiums paid.
- The unforeseen happens and you make a claim against your policy. The amount paid will be less the loan amount (with interest).
With this, I hope you can understand the rationale of the interest rate on your loan taken from your policy.
How About Bonus Encashment?
For any whole life insurance and endowment plans, there will be an annual bonus being declared to your policy. This will be reflected in your annual statement. Also to note is that once this annual bonus is being declared, it will be guaranteed and the insurance company will have no right to withdraw it, no matter how hard they plead with you.
Another thing to learn from the bonus structure is that you have another bonus that’s being declared to you; and thats’ the special or terminal bonus. This will be declared only when the plan is matured, surrendered or claimed. So, when in times of need, this type of bonus is almost untouchable.
Now, back to the issue of bonus encashment, and as understood from a local insurance company, though the annual bonus is guaranteed in your policies, should you decide to encash this bonus, it’ll be of a discounted value. Why is this so and is it a common practice for all insurance companies – it will be best to check with them.
Also to note is that this discounted value will be of a small value if there is a long remaining duration to the maturity date of your plan.
In summary, though the choices seem to be unfavorable when you are in need of money and wish to take up a loan, this is the common practices of insurance companies and financial institutions. But as a rule of thumb to a proper financial planning – one should always have at least six months of your income set aside as emergency funds, safely locked away in another bank account with no easy access to withdrawals.