Borrowing and the Whole Life Policy

These bank loans can be structured with interest-only or principal-and-interest repayments. As with an insurer-funded loan, the policyholder in this scenario will have ongoing premium payments — plus loan repayments. If the loan has a variable interest rate, that repayment burden could rise over time.

3. Borrowing From a Third-Party Broker

Broker-funded loans also take the whole life policy as collateral. However, the broker/lender will assume responsibility for the policy’s premiums going forward. So, the broker-funded loan results in a cash payment to the policyholder — up to 95% of the policy’s cash value — and eliminates the burden of future premiums.

Repayment of interest and/or principal is optional, and the broker guarantees a minimum death benefit. If the policyholder makes no repayments, the interest accrues until the policyholder passes. The broker then repays the loan plus interest from the death benefit. Beneficiaries would receive any amounts remaining or the minimum guaranteed death benefit.

Unlike the insurer-funded loan, a third-party broker loan has no potential tax consequences. There’s no danger of a policy lapse since the broker keeps the policy in force.

Relative to a bank loan, the third-party broker loan lowers the policyholder’s future out-of-pocket expenses — since premium payments and loan repayments are not required.

The policyholder does have the option of repaying a third-party broker loan. Doing so would restore the full death benefit and shift the responsibility for premiums back to the policyholder.

Broker-Funded Loan Example

Consider a $250,000 whole life policy with a cash-value balance of $100,000. This policy could support a broker-funded loan of up to $95,000.

If the policyholder passes away just after the loan funds, beneficiaries will receive a death benefit of $155,000, or the $250,000 policy value less the $95,000 loan balance.

As time passes, if no repayments are made, that death benefit would be reduced by accrued interest and future premium payments. The death benefit cannot, however, fall below the guaranteed minimum.

Because the broker pays the premiums going forward, a broker-funded loan is useful for policyholders who need to lower their expenses. It’s also a good option when the policyholder wants to keep some of the death benefit but does not plan on repaying the loan.

A More Flexible Option

All three types of whole life insurance loans can produce fast cash with optional repayment. But the broker-funded loan is the most flexible solution for the policyholder. The policyholder raises cash while eliminating premium payments — without the worry of lapsing the policy and accidentally incurring taxes.

The outcomes for your clients are cash now, elimination of out-of-pocket premium and interest expenses, and a guaranteed death benefit. That’s a tough combination to beat.

Lucas Siegel is the founder and chief executive officer of Harbor Life Settlements, a life settlement company, and Harbor Life Brokerage, a life settlement broker.