The rate of interest

The rate of interest on policy loans varies from company to company. Some determine the rate with reference to the rate of interest currently obtainable on Government securities, while others calculate it with reference to the average yield on their existing holdings of gilt-edged stocks - the latter method normally produces a lower figure.

Others link the rate to current short-term interest rates. In any case, the company usually reserves the right to alter the rate of interest payable on the loan.

At some times companies may for technical reasons not want to advance money on loan against policies and will deter policyholders from borrowing by raising the interest rate to prohibitive levels.

Other lenders such as banks will normally lend on overdraft against the security of a life insurance policy, and will register a charge against it to defend their interest.

As noted earlier, life insurance polices are designed for long-term saving and protection and if surrendered in the early years will produce a poor return. It is not normally a good idea to surrender a policy if this can possibly be avoided.

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The non-forfeiture period and Surrender Value

With policies that have acquired a surrender value, the procedure is different. The normal practice is to use the surrender value of the policy to pay the premiums as they fall due, thus maintaining the policy in force for the policyholder, for a period of 12 months, or more in some cases. This is known as the non-forfeiture period. If the policyholder then wishes to revive the policy, the overdue premiums plus interest have to be paid and a declaration of health made.

If the option of reviving the policy is not taken up, then many companies will automatically make the policy paid-up. The... see: The non-forfeiture period and Surrender Value

Of interest