Is it Legal for a Company to Take a Loan Against Your Life Insurance Policy?
Life insurance policy loans are one of the best features of a life insurance contract. Life insurance policy loans, however, must be taken by the policy holder. This means that only the owner of the policy has a right to access its cash value. A company cannot take a loan against your life insurance policy if you are the owner of that policy.
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Benefits
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Generally, your company is not allowed to access your life insurance policy cash values. This means that you have full control over the cash values. This is beneficial for you since you don't have to worry about the company depleting the policy and leaving you without any life insurance.
Significance
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Certain exceptions may apply to the fact that you are the only person allowed to access your policy's cash values. For example, you may have an agreement with your company that the policy cash values will remain the property of the company. In these cases, the company is a co-policyholder.
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Types
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There are generally two types of loans a company can make against your policy if it has access to your cash values. A fixed loan offers a fixed interest rate. This means that regardless of how long the loan remains open the interest rate charged to the policy remains the same. A variable rate loan is variable and typically tracks the Moody's corporate bond index. The loan rate may change every year.
Function
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When a fixed loan is taken against the value of the policy, the insurance company sends a check to your company. Then the company removes an equal amount of money from your life insurance policy. This money is set aside in an interest-bearing account. The amount of interest the insurance company charges and the amount of money an insurance company credits to the money it removes from your policy is usually the same. A variable rate loan generally means that the insurance company sends the loaned funds to your company but leaves the policy cash value in the policy to continue earning its normal interest rate.
Considerations
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Check to see if your employer has access to your policy cash values. It will be listed as a co-policyholder on your policy. Alternatively, you would have signed an agreement with your company allowing it access to your policy cash values.
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