Insurance Policy Loan Singapore: How does it work?
An insurance policy loan is a common feature for participating policies in Singapore, e.g. traditional whole life and endowment plans. For the most part, it acts as the policy’s contingency plan. In detail, our policy will still be active despite not paying the policy premium beyond the policy’s payment grace period.
In order to activate the policy loan, there are two requirements:
- Policy is active; and
- Policy has accumulated sufficient cash value.
In general, there are two types of policy loans available for most of the participating policies in Singapore.
1. Voluntary Policy Loan
Firstly, we can choose to take up an insurance policy loan based on our existing policy’s value. Generally, we can borrow up to 80% to 90% on the policy’s net surrender value.
Additionally, the loan may not be granted immediately. Instead, the insurance company can defer the grant for up to 6 months (from the date of application).
2. Automatic Policy Loan
In this situation, the policy loan will take place automatically. To clarify, this usually happens when we do not pay the policy premium by the end of the policy’s grace period. Consequently,
Loan Granted = Outstanding Premium
In summary, a policy loan occurs when
- We need money from our participating policy; and/or
- We stop paying for the policy premium
Now, let’s elaborate further on the loan itself.
By and large, the insurance company will impose a clause on the loan amount. For instance, the minimum loan amount may be $100. Additionally, such loan and any outstanding indebtedness shall not exceed 90% of the policy’s cash value. Once it exceeds this threshold, the policy will be terminated immediately.
As a matter of fact, we need to pay interest on the loan granted. To illustrate, this is how it will usually work:
- We borrow X amount from our policy, e.g. $1,000
- The interest accrues daily (in most cases)
- Interest is due on each policy anniversary
Furthermore, the accrued interest constitutes an indebtedness to the insurance company against the policy as it accrues. If there is any interest unpaid when due, this amount shall be added to the principal of the loan. In like manner, the whole sum will accrue interest at the same rate.
By the way, this is the prevailing interest rate from some of the insurance companies in Singapore:
- AIA Singapore: 6% per annum
- Aviva Singapore: 6.5% per annum
- AXA Singapore: 6.75% per annum
- Great Eastern Singapore: 6% per annum
- Manulife Singapore: 6.75% per annum
- NTUC Income: 5.5% per annum
- Prudential Singapore: 5.75% per annum
🧐 Do You know?: If we borrow $10,000 from our policy @ 6% per annum (interest accrues daily), we will need to repay a total of $18,220.29 a decade later! 😰
We may repay the whole or any part of the loan together with the accrued interest at any time. Thereupon, any and all indebtedness on the policy at the time of settlement shall be deducted from the outstanding loan.
In the event that a covered event occurs (e.g. pre-matured death), the payout will be made after deducting the outstanding loan from the sum insured.
Finally, our insurance policy cannot be on policy loan forever. Consequently, the policy will be terminated automatically as soon as the sum of the total outstanding loan and its accrued interest goes higher than the policy’s cash value.
Should You take up a Policy Loan?
Above all, we should always have a detailed understanding on our cashflow and to plan our budget with the future in mind. Through comprehensive financial planning, we will be able to react during a financial distress. Thereupon, we should evaluate if there are better options as compared to taking up a policy loan. While it is convenient, it hurts into our future and the scar may become irreparable over time.
Thoughts of the day 💭
- Do you own a participating policy?
- Is taking up an insurance policy loan a good idea?
- How do you plan your cashflow?
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