Content Overview
- Summary
- The Seven Steps To Take Before Asking For A Friendly Loan Against A Life Insurance Policy
- Tips About Who To Approach To Lend Money Against A Life Insurance Policy
- Once Someone Agrees To Make A Loan Based On Your Life Insurance Policy, How To Put The Transaction On A Business-Like Basis
- What To Include In A Loan Agreement Using A Life Insurance Policy As Collateral
Friendly Loans Against Your Life Insurance Policy
What To Include In A Loan Agreement Using A Life Insurance Policy As Collateral
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At a minimum, include:
A rate of interest and when interest is payable.
For instance, interest at the rate of six percent per year, payable on monthly, quarterly, semi-annually or annually.
When you are supposed to pay back the loan.
For instance:
- The loan could be repayable solely out of the death proceeds of your life insurance policy. It doesn't matter whether your condition is cured. Death and taxes are indeed inevitable at some point.
- The loan could be a "demand" loan -- one that is payable when the lender demands it. (And since the lender is a friend or relative, that may be a long time from now.)
- The loan could be payable at a certain date. If the two of you agree, you can always change the date.
- The loan could be payable in installments. If the loan is payable in installments, include whether each installment is interest only, or part interest and part repayment of principal (the amount you borrow.
Whether there is a penalty if you pay early.
If so, describe the penalty. There should be no need for a penalty since your friend or relative will likely want the money back as soon as practical.
Describe that the insurance policy is collateral to secure repayment of the loan, and the beneficiary designation.
Mention that the lender is named a beneficiary, and that you will not change the designation of beneficiary until the loan including interest is repaid.
Describe the arrangement concerning the beneficiary designation.
If necessary, state that the designation of the lender as beneficiary is irrevocable -- which means you can't change it. If you pay off the loan, the irrevocable amount will still go to the beneficiary so long as you keep the payments going.
Describe your obligation to continue to pay premiums so long as the loan is outstanding, and what happens if you can't pay the premiums.
Include a provision that you will notify the lender well before the due date in case you can't make a premium payment on time.
Give the lender the right to pay the premiums -- and to add any amount he or she pays to the amount of the debt secured by the life insurance policy.
Check the law in your state.
Determine whether there are any modifications necessary to the above or if there are other requirements that relate to content of the agreement and how it should be executed to make it legally binding.
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