Insurance Policy Loans
The term policy loan is always used when getting something from an insurance policy other than the promised benefits stipulated in the insurance contract. A policy loan is not a loan but a cash advance which the insured will eventually pay out of his insurance proceeds. It does not create a debtor-creditor relationship between the insurance company and the insured because the insured do not have the obligation to pay his cash advance. He can do so if he desires but in case of non payment and the insured dies, the cash advance will be deducted from his insurance death benefits plus whatever interest his cash advance incurred. The insurance company must charge interests since its policy values are based on the assumption that it can invest unused premiums. Cash advances deny the company of the chance to earn on its investment. The imposed interest offsets this fact.
If the policy loan and its accumulated interests add up to an amount that is greater than the surrender value of the insurance policy, it will expire. So if the surrender value of an insurance policy is higher than that of the policy loan allowed by the company, the insured can instead opt to surrender his policy to avail of the higher value.
If an insured chooses to avail of a policy loan and it lapses, he can still enjoy insurance coverage by acquiring an extended term or reduced paid up insurance option. An extended term insurance usually begins from the due date of the default premium and not from the end of the grace period. Under a term insurance, an insured is covered by the value of the face amount less whatever unpaid policy loans and its interests for a period that the cash surrender value provides. The reduced paid up option on the other hand provides a coverage amount and duration that is provided in the policy immediately before it lapses. The coverage amount is usually whatever amount that the cash surrender value can purchase.
All insurance policies are dictated by law to have an automatic non forfeiture option to protect the interests of the insured. Non forfeiture benefits are stipulated in the contract but in cases that the insured fails to select an option, the automatic non forfeiture policy will apply which typically is an extended term insurance.
There are cases wherein an insured tries to exercise his non forfeiture option but dies before the transaction is complete. The question then arises on whether it is the insurance death benefit or the non forfeiture benefit which should be paid. In such a case the majority of courts decides that the forfeiture option is an offer that is continuing and irrevocable, from the insurer to the insured, and that if accepted according to the stipulated terms will result in a contract that is binding to both parties. Therefore it is the non forfeiture value that the insurer will pay to the insured's beneficiaries or to his estate.
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