The Policy Owner receives the Loan and never has out-of-pocket expenses. The beneficiary receives the net benefit if the Insured dies during the Loan Term. If the Insured outlives the Loan Term, the Policy Owner waives the remaining benefit and the Lender cancels the Loan.
Frequently Asked Questions
What advantage might a Private Policy Loan have over a Viatical Settlement?
About 80% of Insureds die during the Loan Term. The Private Policy Loan delivers some net benefit to their beneficiaries after deducting Loan principal, interest, and fees. The Viatical Settlement is a single lump-sum payment with no possibility of further benefit. If having some benefit is absolutely essential, the Retained Benefit Life Settlement could be the answer if available.
How does the initial Private Policy Loan payout compare with a Viatical Settlement?
The Private Policy Loan’s initial payout is generally lower than the Viatical Settlement’s lump-sum payment. The difference is a consequence of the Lender’s more difficult business design which ends up with a thinner profit margin. The Lender’s only collateral is the policy’s death benefit and thus the Policy Owner does not pledge any assets. The loan is legally known as “Non-Recourse.”
Lenders must plan to lose some money on the roughly 20% of cases that outlive the Loan Term. Depending on the specifics of a Loan, the remaining death benefit might not cover the Lenders’ internal costs and they would become “upside-down” on the Loan.
Lenders also must comply with the ever-changing patch quilt of state consumer loan or in some states mortgage loan regulations on interest rates and everything else. As a result, Lenders must reluctantly avoid states where they cannot hope to reliably make money.
Funders face a much a simpler proposition: they buy the policy with one lump-sum, pay premiums, and collect the entire benefit.
If the policy has an Accelerated Death Benefit feature, is it possible to get a Private Policy Loan and then pursue the ADB with the reduced policy?
Private Policy Loan contracts lock up the Accelerated Death Benefit feature if it has not been transacted. Otherwise, the Policy Owner could double-dip by getting a Private Policy Loan and then carve out more or all of the policy’s remaining benefit via the ADB. It is for that reason that we educate the public on the fact that the ADB would have to be transacted before getting a Private Policy Loan.
In our comprehensive Accelerated Death Benefit section, we outline a number of scenarios regarding the options available for cases when the Insured can qualify for the ADB or the ADB has already been paid to the Policy Owner.
How does the Private Policy Loan differ from the carrier‘s loan based on the policy’s cash surrender value?
The Private Policy Loan is usually much greater than the average carrier policy loan from a Universal Life or Whole Life policy. The Lender pays premiums and adds those payments to the Loan, which also includes deferred interest and Loan fees.
By contrast, life insurance companies use the policy’s cash surrender value as collateral for an internal policy loan with a specified rate of interest. The Loan principal, interest, and fees reduce the death benefit dollar for dollar. The Policy Owner continues to maintain the policy by paying premiums as required.
Thus, the carrier has zero risks because they are effectively lending back the Owner’s money and charging interest in the bargain.
Why is it harder to qualify for a Private Policy Loan than a Viatical Settlement?
The Private Policy Loan now stipulates a minimum age of 60, while Viatical Settlement Funders will accept a minimum age of 30. The Lenders now require a policy of at least $100,000, while Viatical Settlement Funders will work with $50,000. The big difference in qualification criteria reflects the fact that Lenders have a far more challenging and expensive business design than Funders. Over the years, Lenders have been forced to narrow their underwriting to the point where the target health profile is that of an Insured with last-stage metastatic cancer and a lifespan far below 2 years.
What kind of interest rates are charged for the Private Policy Loan?
Private Policy Loans are unique. You cannot get one from banks, brokerages, or high-interest-rate personal Lenders.
Each Private Policy Loan case is reviewed based on the specifics of the Insured’s health condition and how certain the Lender is of their probable lifespan. Such Lenders know from experience that roughly 20% of Insureds will outlive the Loan Term. When that happens, the Policy Owner signs over the remaining death benefit. Even so, Lenders may find themselves “upside-down” on such Loans.
Every state regulates consumer loans. and some regulate the Private Policy Loan through its mortgage loan division. The Loan Term Sheet contains every disclosure required by the state overseeing the Loan. The Loan interest is a final number, not one subject to negotiation as with credit card issuers or banks.
Does the Private Policy Loan have Loan fees?
As with a mortgage, there are “points” on every Private Policy Loan. They are disclosed along with interest rates and other Loan conditions.
Are Private Policy Loans available in every state?
Each state creates its own set of consumer loan and mortgage loan regulations, which change frequently. As a result, Private Policy Loan companies do not do business in some states and maintain a constant vigilance to be certain they do not overstay their welcome where they now function.