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Life Settlement vs. Policy Loan: Which Option Makes More Sense?
By Saul L. Appel, CLU®, ChFC®
A policy loan and a life settlement can both provide access to money, but they work very differently.
A policy loan allows the owner of a cash-value policy to borrow against available policy value while keeping the coverage. Interest accrues, and an unpaid loan generally reduces the death benefit. If the loan becomes too large, the policy may lapse and create unexpected tax consequences. The owner remains responsible for monitoring the policy and paying any required premiums.
A life settlement is a sale. The owner receives an agreed cash payment, and the buyer becomes responsible for future premiums and receives the death benefit. The seller gives up ownership and the beneficiaries no longer receive the sold policy’s death benefit.
The better option depends on the owner’s goals. A loan may make sense when the need for cash is temporary and the death benefit is still important. A settlement may deserve consideration when the coverage is no longer needed, premiums are burdensome, or the policy is likely to lapse or be surrendered.
Before deciding, compare the available loan amount, interest rate, projected policy performance, remaining death benefit, settlement offer, taxes, and impact on beneficiaries. An in-force illustration can show how a loan may affect the policy over time.
Neither choice should be made from a single number. Review the complete policy first.
For an independent evaluation, visit Policy-Cash.com.
Saul L. Appel, CLU®, ChFC® | President, Appel Financial, Inc. | 50+ years experience