Sean Meaike
Shawn Meaike

Why Banks Are Lending Against Life Insurance

Whole-life insurance allows policyholders to borrow against their policies’ cash value in certain situations when they’re strapped for cash. This money isn’t taxed inside policies nor subject to tax when borrowers withdraw it as a loan.

Shawn Meaike says that when banks lend against life insurance, it gives policyholders a chance to use their whole-life insurance for more than just the death benefit.

The Process of Borrowing Against Life Insurance

Many banks that are lending against life insurance may not have the technology required to ensure a seamless service, meaning it’s a long-winded procedure. In fact, a few banks opted out of providing the service due to its ‘too-painful’ proceedings.

Everything from origination to collateral management is manual because banks are forced to work with whole-life carriers utilizing archaic systems. Employees are putting in extra shifts just to administer the lending.

There are, however, new platforms available that makes it easier for banks to participate in lending against life insurance — an extremely low-risk-to-lender financial product.

These companies are working with banks that wish to scale this line of credit, while fostering deeper relationships with their customers.

But it isn’t just about the low risk of losses; this lending serves a presently marginalized market within the consumer lending sector, offering a unique perspective and competitive advantage over other banks.

Why Banks are Lending Against Life Insurance

Banks certainly reap rewards from lending against life insurance since they take on next to no risk by offering them.

However, they don’t provide such a product for this reason alone.

This section of the consumer lending space is currently underserved, making banks stand out from the crowd. They’re more likely to nurture successful client relationships by filling the market gap.

Sean Meaike

Borrowing Against Life Insurance May Not Be Right for Everyone

On the consumer side of things, there are pros and cons to borrowing against life insurance policies. And like everything in life, it isn’t the right option for everybody.

• Potential Benefits

Life insurance loans require no hard credit inquiries, so they won’t impact borrowers’ ratings, meaning it’s one of the greatest options for loan-needing bad-credit holders.

Additionally, banks use the policy itself as collateral instead of an asset. Therefore, borrowers aren’t at risk of homelessness if they default on the repayments. The worst-case scenario? The policy lapses.

• Potential Drawbacks

On the other hand, policyholders can’t borrow against their cash value until enough time has passed. Unfortunately, the borrowing amount is negligible over the first few years. Typically, it takes ten years or more to build a worthwhile fund.

Plus, if the policyholder passes away before repaying the loan, the death benefit reduces by the amount owed.

Wannabe borrowers should weigh the pros and cons based on their situation to decide whether it’s the best solution.