Consumers with liquidity needs don’t always think that they have the necessary financial resources in the drawer. Policies that can be lent include life insurance and private pension schemes. However, life insurance and Rürüp and Riester pensions are not eligible for a loan.
Depending on the duration of the savings phase and the amount of the contributions paid, a considerable sum can be accumulated over the years. Together with the interest earned, this creates the surrender value, which can be applied for in part or in full as a loan. A policy loan is not a classic loan within the meaning of the German Civil Code and the Banking Act, since the policyholder has his own capital saved in advance. He receives the discounted expiry payment from the insurance.
How are policy loans repaid?
The policyholder has various options for repaying the loan. On the one hand, the repayment can be made by increasing the monthly contributions.
Another way is the final loan – the loan amount is due at the end of the term. Special repayments are often possible, so that an arbitrary repayment at arbitrary amount can take place at different times during the term. The interest is only counted towards the remaining amount. That means it is always the cheapest to pay off as quickly as possible. Anyone who repays the loan at the end of the term continuously pays interest on the entire loan amount. In this case, a regular repayment of an installment loan can result in lower costs overall, despite a higher interest rate. Because with each repayment, the residual debt and thus the interest burden is reduced.
Ultimately, there is also the option to pay the interest until the end of the term of the insurance and not to repay the advance payment. The insurance contract is then paid out reduced by the sum of the policy loan.
Advantage over buying back or selling
To cover liquidity requirements through life insurance, there is of course also the option of buying back or selling the policy. In both cases, the policyholder does not have to pay interest, but usually makes a loss. It takes many years for the surrender value to exceed the sum of the contributions paid. Subscription costs and ongoing administration costs are taken out of the contributions, which inevitably leads to a slower capital increase. Buyers of life insurance promise a higher redemption, but it is not significantly higher than the surrender value of the insurance.
Take out policy loans from an insurer or a bank?
Traditionally, the policy loan was always issued by the insurer with whom the contract was placed. In the meantime, however, third providers are also offering policy loans. The insurance is deposited as collateral and the loan is paid out in the amount of the surrender value.
In the case of unit-linked policies, however, policyholders can expect massive discounts if the insurance contract serves as security. The reason for this is the possible price losses of the funds during the term of the loan. In the case of a fund policy that is based purely on equity funds, the discounts are around 40 percent of the surrender value. Contracts with a high proportion of pension funds are slow to 80 percent.
The past has repeatedly shown that it makes more sense to take out a policy loan in the classic sense, ie as a discounted payment. In case of doubt, assigning the insurance as security for a loan offers a lower payment and can be associated with a higher interest rate. In addition, a policy loan from a third-party provider meets the requirements for an installment loan, which in turn leads to credit record relevance. However, it is always worth comparing as many offers as possible before making a decision, since interest rates vary considerably depending on the insurance company and bank.