Provisions Specific to Cash Value Policies

Policy Loan Provisions in Cash Value Policies

Loan Availability
- Eligibility: Loans are available on cash value policies once sufficient cash value has accumulated.
- Timing: Must be available no later than the end of the third policy year.
Mechanics of the Loan
- Cash Value as Collateral:
  - The cash value itself is not reduced when a loan is taken.
  - It serves as collateral for the loan.
- Interest:
  - Charged annually and can be either fixed or variable.
  - Unpaid interest is added to the loan balance.
Loan Deferment
- Deferral Period: The insurer may defer granting a loan for up to 6 months unless it is for premium repayment (e.g., an automatic premium loan).
Loan Impact on Policy
- Policy Continuation:
  - Failure to repay the loan or interest will not immediately void the policy.
  - The policy only lapses if the total loan balance, including interest, equals or exceeds the cash surrender value.
- Deductions:
  - At the time of a claim, any outstanding loan and interest are deducted from the face amount.
  - Upon surrender, the outstanding loan and interest are deducted from the cash surrender value.

This provision allows policy owners access to their policy’s cash value for financial needs, while ensuring the loan does not immediately jeopardize the policy’s validity.

Policy Loans: Interest Rates and Loan Limits

Interest Rates
- Fixed Interest Rate:
  - The maximum fixed interest rate for policy loans is 8% or less, as specified in the policy.
- Adjustable (Variable) Interest Rate:
  - The maximum rate is tied to Moody’s corporate bond yield average and must also be clearly stated in the policy.
Loan Limitations
- The loan amount available to the policyowner cannot exceed the cash surrender value of the policy at the time the loan is requested.
- This provision ensures that policy loans remain manageable and that interest rates, whether fixed or variable, are transparent and regulated.

Partial Withdrawals or Partial Surrenders

Applicable Policies: Partial withdrawals or surrenders are allowed only in Universal Life (UL) or Variable Universal Life (VUL) policies.
Impact on Policy:
- A partial withdrawal reduces both the cash value and the death benefit of the policy.
- Withdrawals are paid based on the FIFO (First-In, First-Out) method, where withdrawals up to the amount of premiums paid are not taxable.
- Any amount withdrawn beyond the premiums paid is considered a return of earnings and is subject to taxation.
Fees and Limitations:
- There may be surrender or withdrawal charges.
- The insurer may impose limits on the number of withdrawals per year or set minimum and maximum withdrawal amounts.

This provision ensures that the policyowner can access some of the cash value while understanding the potential tax and policy impact.

Surrenders

Definition: When the owner of a cash value policy decides to surrender the entire policy, they cancel the insurance coverage. The policyowner is entitled to receive the cash surrender value, which is the policy's accumulated cash value minus any applicable surrender charges.
Surrender Charges:
- Universal Life (UL) and Variable Universal Life (VUL) policies often have a surrender charge schedule.
- This schedule typically lasts between 10-20 years and shows the percentage of the cash value that is subject to a surrender charge.
- The surrender charge generally reduces annually over time, so the longer the policy is in force, the less the policyowner will lose to surrender charges.
Purpose of Surrender Charges:
- The difference between the cash value and the cash surrender value is the surrender charge, which helps the insurer recapture the upfront expenses associated with issuing the policy.
- This provision ensures that if the policy is surrendered, the insurer can recover costs while offering the policyowner access to the cash value, though with potential financial penalties if the policy is surrendered early.