What is Zero-Cost Loan Provision?
A Zero-Cost Loan Provision is an option available in certain Permanent Life Insurance policies, such as Whole Life or Indexed Universal Life (IUL), which permits policyholders to take loans from their policy’s cash value without paying traditional interest rates. This provision is designed to make accessing the policy’s cash value more affordable, as it eliminates or significantly reduces the cost typically associated with policy loans.
The mechanics of a Zero-Cost Loan Provision often involve a matching interest rate on both the loan taken from the policy’s cash value and the credited interest rate to the remaining cash value. For example, if a policyholder borrows $10,000 from a policy with a Zero-Cost Loan Provision, the insurance company may charge a 2% loan interest rate while simultaneously crediting the same 2% to the remaining cash value, resulting in a net-zero cost.
This feature can be highly beneficial for policyholders who plan to use their policy’s cash value for financial needs or investment opportunities, as it allows them to borrow without the typical financial burden of loan interest, preserving more of the policy’s growth potential.
The Zero-Cost Loan Provision is ideal for individuals who view their life insurance policy as a long-term financial tool and want to maximize their cash value without diminishing returns due to interest charges.
