Take out a Loan from Life Insurance Policy

In case of emergency or you need cash urgently but don’t have enough savings, you can get a loan from an insurance policy. However, you need to study basic information well because the insurance policy eligible for the loan must be in force, and the Insured hasn’t used their rights to change it to a Paid-up policy (When stop paying the insurance premium, the protection coverage limit is reduced but protection period remains the same), and convert the policy to Extended-term insurance (When stop paying the insurance premium, the protection coverage limit remains the same but protection period is reduced).


In fact, an insurance policy for the loan must hold existing cash value or expropriation value because it will be used as collateral borrowing. In general, the cash value will happen when the premium has been paid for 2 years and over. We can apply for a loan no more than the expropriation value available at that time. Life insurance that holds cash value and can be loaned comprises three types; Endowment, Whole Life, and Annuity.


The cash value of the life insurance policy will be increased according to the contract period. If the policy emphasizes high protection coverage or it is a whole-life policy, the cash value will be moderate. If it is an endowment policy that emphasizes savings, the cash value will be high as some parts of the premium will be taken to invest and generate returns.

The method to check the amount of cash value of the policy can be seen from the Policy Table which states the number of policies and the amount of expropriation value per 1,000 Baht of the sum insured as of the end of the year.

 

Expropriation value 

= sum insured  x the amount of Expropriation Table as of the end of yea    1,000


We look at expropriation value to check how much is the maximum loanable amount we can get. Normally, the insurance company will approve a loan not exceed than expropriation value available in the year applied for a loan. Or, some companies may offer the maximum loan at 90% of expropriation value.

For example, Sum insured 1,000,000 Baht. After 3 years, apply for a loan, and find out at the end of the year that the 3rd year policy holds expropriation value at 300 Baht. 

Policy Expropriation value 

= 1,000,000 x 300 = 300,000 บาท

       1,000


The amount of expropriation value in the 3rd year is 300,000 Baht, this policy will generate a loan not exceeding 300,000 Baht, or 270,000 Baht in case the maximum loan is approved at 90% of expropriation value. 


The interest calculation of loan from the insurance policy is Effective rate comprising 2 parts; calculate from policy interest rate (depending on that policy), and from insurance premium mostly at 2%, and then combine them to be the loan interest rates, such as 3% policy interest rate, and 2% insurance premium. That means the loan interest rate is 5% per year but the insurance company will calculate daily interest.

 

Calculation of policy loan interest 

= policy loan x loan interest

                             365


Suppose the Insured wants to get a loan from this policy in the 3rd year at 100,000 Baht with a 5% interest rate per year.


Policy loan interest

= 100,000 x 5% = 13.70 บาท

             365


That means the Insured must pay 13.70 Baht interest per day. Thus, after getting the loan for 30 days and the Insured wants to pay the entire debt, interest will be 411 Baht (13.70 x 30). Therefore, the total amount to be paid is 100,411 Baht (100,000 + 411) (in case of a 30-day loan). 
 

As the interest of policy, loan is Effective rate; therefore, when payment is partly made, the insurance company will deduct from the principal before calculating interest, such as paying 10,000 Baht after 30 days and then the insurance 


 90,000 x 5% = 12.33 บาท

         365


company will take this sum of money to deduct from 100,000 Baht principal, so the remaining principal is 90,000 Baht.


Suppose 30 days later, the Insured wants to pay the rest of interest, the entire payment will be 90,780.90 (90,000 + 411 + 369.90); 90,000 is the remaining principal, 411 is interest for the first 30 days, and 369.90 is the 30-day interest of 90,000 Baht principal

Even though a life insurance policy is a good source of loan. Never forget that the objective of life insurance is to get protection and financial security in the long term. If the value of the loan and accrued interest are higher than the expropriation value at that time, the policy will expire. That means protection coverage will be ended accordingly. Once you get a loan, be disciplined to pay back your debts to secure your financial status and that of your family in the future.

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