Policy loans under the microscope: Mortgaging your life insurance: Is that a good idea?

Policy loans under the microscope
Mortgaging your life insurance: Is it a good idea?

02.09.2024, 07:12

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Money worries can be extremely stressful. Some people might then come up with the idea of ​​using an existing life insurance policy as a mortgage. Here's what you need to be aware of.

Are you short on cash right now, but have a life or pension insurance policy in reserve? If you have paid into such a policy for years, you may have saved up a considerable amount of capital over time. The problem is that the money is only available at the end of the contract term, and early termination usually results in major losses. This is no use for financial bottlenecks in between. But what is generally possible is to mortgage the insurance, i.e. take out a loan on it – the so-called policy loan.

Such a loan is final. Borrowers also only pay the interest during the term, and only pay the loan amount in one lump sum at the end. The police serve as security for the insurer or financial institution. But how sensible is it to take out such a policy loan? Here are four points that should be considered when making a decision:

1. What requirements must be met for a loan

“In general, only contracts that are not subsidized can be used as a loan,” says Elke Weidenbach from the NRW consumer advice center. This means that Riester, Rürup and direct insurance contracts within the framework of company pension plans are not eligible for a policy loan. In addition, the insurer must generally be based in Germany.

According to the advice portal Finanztip, It also depends on the surrender value and the loan amount – both of which must exceed a certain minimum limit. The surrender value, also the amount that the insured person would get back from the insurer after cancelling their policy, must therefore be at least 1,000 euros for classic life insurance policies with a guarantee and at least 1,667 euros for unit-linked contracts.

The desired loan amount must usually be at least 1000 euros in Finanztip. Policy loans will not be granted for less than this amount. Some providers set the minimum loan amount even higher.

2. How much you can borrow against life insurance

In the case of capital-forming life insurance, lenders the loan is usually for a maximum of the existing surrender value. “The borrower receives the loan, so to speak, on the money that has already been saved in the contract,” says Weidenbach. According to Finanztip, in the case of unit-linked pension and life insurance, insurers and financial institutions usually approve loan amounts of a maximum of 60 percent of the current surrender value due to the possible fluctuations.

The conditions for the loan depend on the provider, the term and the amount of the loan. Anyone considering a loan should ask the insurer about the surrender value of the life insurance. The next step is to ask a bank or savings bank about the possible amount and conditions of a loan on the life insurance – and also get offers from other providers.

3. What speaks against lending against life insurance

“It's a bad deal at the end of the day,” says Weidenbach. This is because borrowers usually continue to pay their life insurance premiums during the term of the loan. The premiums paid only partially go into the savings part, with the insurer's costs and amounts for risk coverage (death) deducted. The interest rate on what's left is comparatively low.

On the other hand, borrowers take out a loan on the money they have saved in their life insurance, for which they have to pay significantly higher interest. “That doesn't pay off,” says Weidenbach.

According to Finanztip, policy loans are also inflexible compared to other types of loans. The loan amount and repayment terms can usually no longer be adjusted after the loan has been taken out. And anyone who plans to use the money for retirement but cannot necessarily guarantee repayment must expect to be missing some of the money in old age.

4. What alternatives are there to a loan

Anyone thinking about mortgaging their pension or life insurance should at least compare the alternatives. What is ultimately the best solution depends on the individual case. Independent advice – for example from a consumer advice center – can help with the decision. These are the options:

• Partial cancellation: It is conceivable, for example, to partially cancel the life insurance. Insured persons then receive at least part of the surrender value from the insurer and only have to accept the relevant deductions. The remaining part remains within the scope of the insurance. However, according to Weidenbach, partial cancellation requires that contributions of a certain minimum amount have already been paid. The amount is stated in the insurance documents.
• Temporarily suspend contributions: According to Weidenbach, anyone who is in acute financial difficulties can also consider temporarily suspending their life insurance contributions. “When it is financially possible again, you can continue to pay the contributions regularly in consultation with your life insurer,” says the consumer advocate.
• Sale: Depending on your individual life situation, it may make sense to sell a life insurance policy to a company. This means that the payout no longer goes to the original insured person, but to the buyer. Weidenbach claims that this is a better option than if you cancel the contract completely and only get the low surrender value.
• Use as security for an installment loan: “It is also conceivable to use the life insurance as security for an installment loan,” says Weidenbach. This way, too, insured people can get a loan that is possibly cheaper and more flexible than the policy loan. Here, too, it is worth comparing offers.