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Friendly Loans Against Your Life Insurance Policy

The Seven Steps To Take Before Asking For A Friendly Loan Against A Life Insurance Policy

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Step 1. If you haven't already, review our information on How To Deal With A Financial Crunch.

Perhaps there are alternatives that would decrease the amount of money that you need, or even eliminate the need all together.

Step 2. Determine whether there are alternatives for getting money from a life insurance policy.

First look at the policy to see if there is either a Cash Value or a Living Benefit provision. If there is no provision about a Living Benefit, it doesn't mean you don't have it. It may have been added after the policy was issued, or could be added by a simple call to the insurance company.

If there is a Cash Value or Living Benefit, you can take the money from the insurance company, and still ask a friend for a loan against the remainder of the death benefit.

Step 3. Consider whether you qualify to receive money by selling your life insurance policy as a Viatical Settlement or a Life Settlement and whether you can borrow money from commercial lenders.

To learn more, see Selling Your Life Insurance Policy As A Viatical Settlement or a Life Settlement, Commercial Loans Against A Life Insurance Policy.

Step 4. Contact the life insurance company to find out what is possible.

Let the company know that you are considering borrowing money from a friend and using the policy as collateral to secure the loan.

Ask:

  • Is your current beneficiary named "irrevocably" or can you change the person's identity?
  • If the beneficiary is named irrevocably:
    • You cannot change to another beneficiary unless the irrevocable beneficiary agrees in writing.
    • If the irrevocable beneficiary doesn't to a change, you can ask him or her to lend you the money. It is in the person's interest to make the loan if he or she believes you will cancel the policy without the loan.
    • Another alternative is ask the irrevocable beneficiary if he or she would agree to turn over to the lender an amount of money equal to the outstanding debt at the time of your death.
  • If the designation is not irrevocable, you can change the name at any time. Find out from the insurance company what your alternatives are to protect a friendly lender. For example, is it possible to name a person as beneficiary in a way that tracks an outstanding debt, with the rest of the death benefit payable to someone else? Let's say you have a $100,000 life insurance policy, borrow $10,000 at 6% interest and you don't pay anything back. If at the time of your death, the debt plus interest totals $16,000, can you provide that the amount of the debt then outstanding ($16,000) would be payable to your friendly lender, and the remaining amount ($84,000) would be payable to whoever you designate? If the insurance company will go along with this idea, what proof will be required to show how much debt is outstanding at the time of your death?
  • If the insurance company won't go along with this idea, can you designate dollar amounts to go to different beneficiaries? For example, the $100,000 policy, with the $10,000 loan: If you think the debt at the time of your death could be $16,000, make an amount payable to the lender an amount with a cushion - say make the amount $25,000. The rest would be payable to someone else. (You can have a letter agreement with the lender saying that the amount over and above the debt will be payable to whoever you designate. Or you could let the person have the extra money with your thanks.)
  • Is it possible to provide that if premiums are not paid on a timely basis, that the insurance company will notify the lender instead of letting the policy lapse? If so, how?

Step 5. Think through how much money you will need.

Of course expenses relating to a health condition can vary greatly, and unexpected expenses can occur.

As an aide to help determine how much you need, look at our information on Financial Planning and complete the interactive charts. You don't have to adjust the amount to reflect taxes because money from a loan is tax free to you. You get to keep all of what you borrow.

Step 6. Think about what rate of interest you should suggest paying. (Interest is the price you pay to borrow money.)

A friend or relative may say that no interest is necessary. However, to have the transaction considered to be a loan, interest is required at least equal to the minimum specified by the IRS. See www.irs.ustreas.gov offsite link to find the minimum rate at the time the loan is made.

Step 7. Think through when you will likely be able to repay a loan, including interest.

As you will see, it's important to be open with a friendly lender about whether you will be able to repay the loan, and if so when.

Again, our information on Financial Planning may help. If the result is you are not likely to be able to repay the money, you can ask that the principal and interest be repaid from the death benefits of your life insurance policy.

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