Policy Loan (Policendarlehen)

Concept

A policy loan is a loan granted by a life insurer to the policyholder of a surrenderable life insurance policy, with the policy’s surrender value serving as collateral for the loan. Unlike a full surrender of the policy, insurance cover under a policy loan generally remains fully intact.

Structure

The amount of a policy loan is generally limited to a certain percentage of the current surrender value, so as to leave the insurer sufficient margin for any offsetting against the insurance benefit becoming due in the event of default. The loan accrues interest at a rate set by the insurer; if the loan and interest are not repaid, it is offset against the insurance benefit when this falls due (e.g. on death or maturity).

Relevance for Insurance Practice

A policy loan offers policyholders a flexible, unbureaucratic financing option without giving up existing insurance cover through surrender or cancellation of the policy; however, it should be carefully weighed against other forms of financing, as non-repayment correspondingly reduces the insurance benefit ultimately paid out.