When clients need additional liquidity, their existing life insurance policy may offer more options than they realize.
For policies with sufficient cash value, borrowing against the policy can provide access to funds without immediately surrendering coverage. But for clients who no longer need their death benefit, a life settlement may offer another alternative worth considering.
At Abacus Life Solutions, we believe understanding the differences between these options can help advisors determine which approach best aligns with their clients’ financial goals.
What Is a Life Insurance Policy Loan?
A policy loan allows the owner of an eligible permanent life insurance policy to borrow against its accumulated cash value.
Unlike a traditional bank loan, policy loans generally do not require a credit check, and repayment schedules may be flexible depending on the policy.
However, borrowing against a policy comes with important considerations:
- Interest charges: Outstanding loans accrue interest, which can increase the amount owed over time.
- Reduced death benefit: Unpaid loan balances generally reduce the amount beneficiaries receive.
- Policy performance: Large outstanding loans may increase the risk of a policy lapsing if not properly managed.
Policy loans can provide flexibility for clients who need temporary liquidity but want to maintain their life insurance coverage.
What Is a Life Settlement?
A life settlement allows an eligible policyholder to sell an existing life insurance policy to a third party in exchange for a lump-sum payment.
The buyer assumes responsibility for future premiums and receives the death benefit when the insured passes away.
For qualifying policies, a life settlement may provide more than the policy’s cash surrender value while eliminating future premium obligations.
Unlike a policy loan, a life settlement is a permanent transfer of ownership. The original beneficiaries generally no longer receive the death benefit.
Life Settlement vs. Policy Loan: Key Differences
Although both options can provide liquidity, they serve different financial needs.
| Factor | Policy Loan | Life Settlement |
|---|---|---|
| Access to Funds | Borrow against available cash value | Receive proceeds from selling the policy |
| Policy Ownership | Client retains ownership | Ownership transfers to the buyer |
| Death Benefit | Generally reduced by outstanding loan balance | Transfers to the buyer |
| Future Premiums | Client remains responsible | Buyer assumes responsibility |
| Interest Charges | Interest accrues on the loan | No loan interest |
| Best Suited For | Clients who want liquidity while keeping coverage | Clients who no longer need or want coverage |
When Might a Policy Loan Make Sense?
A policy loan may be appropriate when a client needs access to funds but still has a meaningful need for life insurance.
For example, a client may want temporary liquidity while preserving coverage for family members or estate planning purposes.
In these situations, advisors should carefully evaluate the loan’s interest costs, repayment expectations, and potential impact on the policy’s long-term performance.
When Might a Life Settlement Make Sense?
A life settlement may be worth considering when a client no longer needs their existing coverage or finds the ongoing premiums difficult to justify.
Common situations include:
- The original need for coverage has changed
- The client is approaching or entering retirement
- Premium obligations have become burdensome
- Estate or business planning needs have evolved
- The client wants liquidity without maintaining the policy
For eligible clients, a life settlement may provide access to funds while removing the responsibility for future premium payments.
Understanding the Financial Implications
Neither option is right for every client.
Policy loans may create tax consequences if a policy lapses or is surrendered with an outstanding loan. Life settlements can also have tax implications, and selling a policy may affect eligibility for certain means-tested benefits.
Advisors should consider the client’s long-term coverage needs, policy performance, financial objectives, and potential tax consequences before recommending either approach.
Choosing the Right Option for Your Client
The decision between a policy loan and a life settlement ultimately depends on what the client wants to accomplish.
If maintaining life insurance coverage remains a priority, a policy loan may provide the flexibility they need.
If the coverage no longer serves its original purpose, a life settlement may offer an opportunity to reposition the policy’s value toward other financial goals.
The key is understanding all available options before making a decision.
Discover What Your Client’s Policy Could Be Worth
If your client is considering accessing the value of an existing life insurance policy, understanding its potential secondary-market value can help inform the conversation.
