Caring Currents

New Type of Loan Turns Insurance Policies into Cash

Last updated: Aug 08, 2008

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Cash-strapped seniors have seemingly few options when it comes to getting their hands on more money. But now there may be one more possibility.

Similar in concept to reverse mortgages, LegacyLoans, soon to be offered through Legacy Funding Group, will allow older adults to take out a loan against their life insurance policy. They can use the proceeds of the loan for monthly expenses or simply to cover the costs of their life insurance premiums . When they die, the amount of the loan is deducted from the payout to their beneficiaries. There are other insurance companies, including New York Life, which are starting to offer similar products.

Seniors can already sell their life insurance policies, a transaction known as a " life settlement ." For many people, this is a good way to use their existing policies to generate cash during their lifetime. The downside to life settlements is obviously the fact that by selling the policy, there is no payout to your beneficiaries . But by taking a loan out agains the life insurance policy (and in the case of LegacyLoans, you are also required to take out a second smaller policy as collateral) there is still the possibility that the policy beneficiaries will see some money after the policy owner dies .

Some columnists, like Saul Friedman of Newsday, believe that this type of loan is a safer bet for seniors than typical life settlements. "Instead of giving up your policy, you may wish to borrow money on it, like a reverse mortgage, without having to pay it back -- unless you want to. And, like a reverse mortgage, you keep the policy," Friedman writes in his column. He also notes that to be a good candidate for this type of loan policy holders should:

  • Be over 70 years old.
  • Have had a life insurance policy of at least $500,000 for at least two years.
  • Have an expected life span of another 10 to 15 years.

Because they are so new -- and are also somewhat complex in structure -- it's important that seniors thoroughly research the pros and cons of this type of loan before signing up for anything that may impact the security of their insurance. But for people who meet the above criteria, such loans may be a good way to tap into life insurance policies during their own lifetimes.

Photo from Lisa F. Young/Big Stock Photo