Advantages Resulting from the Loan Privilege

While the granting of a policy loan is frequently the equivalent of giving to the insured the surrender value of his policy, there is nevertheless a vital difference between the underlying purposes of .the two. Policy loans were originally granted by many of the leading companies with a view to enabling the insured to obtain the necessary funds in time of financial need to pay his premiums, and thus avoid the necessity of surrendering his policy for its cash value. In this connection, reference may again be made to those provisions in modern policies which allow, either automatically or upon the request of the insured, for the advancing of premiums as a loan against the policy as long as the surrender value is sufficiently large to protect the advances. In fact, some of the largest companies first adopted the loan feature in their contracts during periods of crises, such as in 1893, with the result that much of their insurance in force was maintained by thus temporarily assisting their policyholders.

Not to grant loans in times of financial distress, and at the same time offer cash surrender values, may cause the surrender of many policies in order to realize much needed cash. For many persons, therefore, the policy loan is the means not only of preventing the loss of their insurance but also of temporarily protecting the family from want. Furthermore, the loan privilege has frequently served a very useful purpose in enabling business men to realize additional cash at a time, especially in the midst of a panic, when it is impossible for bankers to meet their requirements. It is at such times, as we have seen, that the loan value of life-insurance, policies.is a real asset which enhances the credit of the business man because it is available on demand, irrespective of the conditions which may prevail, and usually at the fixed rate of 5 or 6 percent.7 In fact, the extent to which policy loans were obtained during the panic of 1907 demonstrated their usefulness as a means of helping in time of need to such an extent as to raise prominently the question whether it is not advisable for life-insurance 5 companies to follow the practice of savings banks in protecting themselves against a possible run at a time when interest rates are excessive and when it is impossible, except at a great sacrifice in values, to realize upon their securities. It is for this reason that many companies have in recent years reserved the right to defer the making of policy loans, except for the purpose of paying renewal premiums, for a period of from sixty to ninety days.