Understanding
Policy Loans
Presented by…
Levi Robinson, CLU, ChFC, FLMI
Director Product & Market Training
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Agenda
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Policy Loan History
Types Fixed, Variable, Participating
How They Work
Which One To Use When
Advance vs. Arrears
Cash Comparisons
Switching Loans
Questions?
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Background Information
 Prior to 1980
 Universal Life not in existence
 Primarily Whole life products with dividends
 Loans were fixed interest rate
 4%- 6%
 High interest rate environment
 Policy owners could borrow from policy and reinvest
at rates as high as 16%
 Negative impact on insurers’ investment portfolio if
there were too many loans
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Background Information
 Around 1980
 Two dividend options were developed
 Direct recognition
 Variable loan
 New products were developed
 Existing products amended with policy owner
acceptance to change dividend option
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Background Information
 Direct recognition
 Fixed loan interest rate
 Usually 8%
 Loans from policy would reduce the annual dividends
payable
 Variable loan
 Loan interest rate variable
 Based on a Moody Bond average
 Dividends not affected by loans
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Background Information
 Universal Life introduced
 Fixed loan product (direct recognition)
 Typical loan
 6% to 6.5% loan interest
 4% credited interest on borrowed money
 2% to 2.5% spread
 Loan modified mid-80’s
 Spread the first ten years
 No spread after 10 years on policy gain
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Unique Feature
 Indexed life products
 Two loan interest choices
 Fixed interest
 Participating interest
 Selected at the time of the loan
 One loan type at a time
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Policy Loan Types
 Fixed Loan – both the loan rate and the borrowed funds are
fixed
 Variable Loan – Two types where both the loan rate and the
borrowed funds participate in an index –
 True Variable loan - loan charge rate set by the Moody’s Corporate
Bond Average while the funds continue to participate in the index
account
 Fixed Loan with Participating Funds - Participating variable loan
has a fixed loan rate while the funds continue to participate in the
index account (less aggressive type of loan structure)
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Fixed Interest Rate Loan
Non Preferred Loan
Preferred Loan
Effective annual loan rate is 4.00%,
Available after the 10th policy year
payable in advance at 3.85%
Up to 10.00% of account value per year
Annual effective rate of 3.00% credited
Loan rate (not guaranteed) currently equals
to the portion of accumulation value that
the credited rate applied to the policy.
equals the amount of policy loans.
Effectively 0% net cost.
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Understanding Participating
Choice Loans
The crediting rate is the
same for borrowed and
non-borrowed funds
The policy value, including the
outstanding loan balance,
continues to earn interest as if no loan
had been taken from the policy.
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How Much?
The maximum loan amount a policy holder may
take is equal to the policy’s cash surrender value
less three times the amount of the charges we
assess against the accumulation value on the
monthly deduction day, less loan interest that will
be payable on the loan to the next policy
anniversary.
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Zero Net Cost Loans vs. Choice Loans
9.28%
-3%
Fixed
Loan
$20,000
Preferred Fixed Loan = 3% - 3%
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6.00%
Choice
Loan
$20,000
3%
Loan
Account
$20,000
9.28%
Indexed Account
$100,000
Indexed
Indexed Account
Account
$100,000
$80,000
9.28%
Choice Loan = Indexed Account Growth
Rate 6.00% Opportunity for positive net loans
Expect market to be flat or down?
Fixed Interest Rate Loan
 Less expensive
 Withdraw to basis and then loan provides greater cash flow
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Expect market to be strong?
Choice Loan
 “Arbitrage” possible
 Could be greater cash value in the long run
 Generally illustrates more cash flow than fixed
 100% loan illustrates greater income stream
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Arrears vs. Advance Rates
Arrears
Payments Made at the End of a Period
Advance
Payments Made at the Beginning
of a Period
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Loan Rate Example
$10,000 Loan Taken at the Beginning of a Policy Year
With a 6.00% Annual Interest Rate in Arrears.
The Loan Interest Due at the End of the Year (or added to the
loan) is $600.
If interest is paid out-of-pocket at the beginning of the year
(a.k.a. In Advance), Less than $600 in interest is owed.
The In Advance equivalent rate is 5.66%.
Loan Interest out-of-pocket paid at the beginning of the year
would be $566.
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Loan Rate Illustration
For Illustrative Purposes, the advance rate is
converted to an arrears rate and is used to
calculate a year-end interest amount that
may be assumed to be paid out of pocket or
added to the loan.
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Which Products?
Fixed Loans Only
Fixed & Choice Loans
Elite Index
Elite Survivor Index
Elite Global Survivor
AG Extend IUL
AG Choice Index GUL
Elite Global Plus II
AG Secure Lifetime GUL
AG Secure Survivor GUL
Elite UL
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Cash Value Comparison
Fixed Interest vs. Choice Loans
100% Loan
Income
Payout
Age 100 Cash
Value
Death Benefit: Minimum Solve
Choice
Loan
$76,603
$5,099,796
Premium: $20,000 Annual to age 47
Fixed Loan
$59,289
$25,852
Male 40, Preferred Non-Tobacco
Elite Global Plus II
Death Benefit Option: 2
Policy loan starting @ 65 - 90
Age 65 cash value = $653,810
Withdrawal
to Basis,
then Borrow
Solve for income from age 65 to 90
Choice
Loan
Choice loan interest rate = 6.00%
Fixed Loan
Fixed loan interest rate = 4.00%
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Income
Payout
Age 100 Cash
Value
$71,869 $3,786,061
$60,764
$29,897
Changing Loan Types
 Ability to switch from a Choice loan to a fixed
interest rate loan (vice versa)
 Up to a maximum of two times during life of
contract
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Switching Loans…
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Client has been taking $20,000 in Choice Loans for 10 years and is age 70

At age 70 the S&P is down and the client is only earning the minimum
guarantee which is now 0.00% in the Elite Global Plus II 5-Year Global
Strategy
 When the client began taking out loans he/she was averaging a 9.28% rate
of return

With this feature the client can elect to switch to a fixed loan without paying
off the outstanding loan balance and now have a much lower fixed rate with
a portion paying 0.00%
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When to Switch?
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Which option is better?
It Depends on…
Market Conditions
Interest Rate Environment
Each Individual Policy Owner
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Variable Loans Pros & Cons
Pros
•
Allows indexed values to remain
& participate in the performance
of the index/indices account
•
•
Allows the opportunity for the
index to outperform the loan rate
being charged.
Heavily marketed by some
carriers
•
•
Variable loans illustrate higher
disbursements compared to
standard loans
Becomes an illustration game easy to out-illustrate other
competitors, especially with a
true variable loan structure
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Cons
• Possibility the amount credited from
index interest or fixed interest
accounts is less than the interest
charged
• Risk if index performs at less than
the interest charged, the policy
could lapse or income reduced
• Illustrations almost always show a
“positive” spread.
•
Allows the opportunity for the index
to outperform the loan rate being
charged.
• Loan charge could change on
previous loans
Questions or Comments
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Important Information
The information presented herein is not a comprehensive analysis of the topic presented.
Please be advised that any information provided in this presentation is for informational purposes only and should
not be construed by any person as legal, tax or accounting advice. The insurers comprising American General Life
Companies strongly suggest that any life insurance owner, proposed owner, insured or proposed insured retain the
services of qualified tax, accounting and legal counsel for advice on matters presented herein. The insurers
comprising American General Life Companies are solely providers of insurance products.
Policies issued by American General Life Insurance Company (AGL), 2727-A Allen Parkway, Houston, Texas 77019,
The United States Life Insurance Company in the City of New York (US Life), One World Financial Center, 200
Liberty Street, New York, New York 10281, AG Secure Lifetime GUL Policy Form Numbers 10460, ICC-10460, AG
Secure Survivor GUL Policy Form Numbers 11239, ICC-11239, AG Choice Index GUL Policy Form Number 11474,
Elite Global Plus II Policy Form Numbers12967, ICC-12967, Elite Index AGL-08326; USL-08326N, Elite Survivor
Index AGL-08414, USL-08414N, AG Extend IUL AGL-12436, ICC12-12436, USL-12436N, Elite UL AGL-03325,
USL-03325N. The underwriting risks, financial and contractual obligations and support functions associated with
products issued by AGL and US Life are the issuing insurer’s responsibility. All guarantees are subject to the claimspaying ability of the issuing insurance company. US Life is authorized to conduct insurance business in New York.
Policies and riders not available in all states. American General Life Companies, www.americangeneral.com, is the
marketing name for a group of affiliated domestic life insurers including AGL and US Life.
Cases are presented for illustrative purposes only.
AGLC107038
©2013. All rights reserved.
FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC
Cases
only."