In South Africa, you can choose from 3 types of insurance policies:

• Whole life insurance
• Term Life insurance
• Universal coverage

About 20% of South Africans currently have a life policy. This type of policy is more expensive but the good part is that it has no expiration date.

Money paid into the policy exceeding what is needed for the death benefit is invested by the life insurance company, creating a cash value after a few years. This cash value works just like a savings account, which encourages a savings and investing culture among South Africans.

It is only possible to borrow against permanent or whole life insurance.

Loans against insurance policy – How does the process work?

Essentially, a whole life policy consists of a death benefit and a cash value. Once invested money increases the death benefit amount, the tax-free cash value can be borrowed against.

A policy loan is therefore borrowed against your death benefit and the insurance company is using your policy as collateral for the loan.

You are borrowing from yourself, so the loan remains tax free as it is not recognised as income.

The loan must be paid back in a timely manner. If the loan is not paid back before the insured person’s death, the loan amount plus any interest owed is subtracted from the amount the beneficiaries are set to receive from the death benefit.

Loans against insurance policy – What are the benefits?

• There is no approval process, credit check or income verification.
• Interest rates are lower than those of bank loans.
• There are no limits as to how you can use the money.

What disadvantages are there?

• You may have to own the policy for a while (sometimes as long as 10 years) before you can borrow against it.
• Less of your money is available for investment – thus lowering dividends.
• The insurance policy could lapse if the increasing amount of unpaid interest causes your loan balance to exceed your policy’s cash value.

Important tips:

Consult with a financial planner before applying for an insurance policy loan.

Ask your insurer about any processing fees that may be associated with the loan.