Policy loan
A loan made by the insurer to the policyholder up to the contract's surrender value, providing liquidity without a surrender, and so without tax, in exchange for interest.
A policy loan lets a life insurance policyholder obtain money without surrendering the contract. The insurer lends a sum, usually capped at a percentage of the surrender value, lower for unit-linked funds than for the euro fund, for a limited, renewable term. The contract continues to run and earn returns, and serves as collateral. The benefit is twofold. For tax, a policy loan is not a surrender: it triggers no taxation of gains, which makes it useful before the contract's eighth anniversary or to avoid realizing a gain. For wealth planning, it preserves seniority and the invested savings. The policyholder pays interest, set by the insurer, often by reference to the euro fund's return plus a margin. At maturity, the policyholder repays or renews; failing that, the insurer makes a surrender to repay itself, which then triggers tax. On death, an unpaid loan is deducted from the benefit paid to the beneficiary. The tax authorities may recharacterize as a surrender a loan that is not meant to be repaid. The tool is also a liquidity channel that France's High Council for Financial Stability can suspend in a crisis, just like surrenders.
Hypothetical case: a policyholder whose six-year-old contract is worth 200,000 euros needs 40,000 euros for a property deposit. Rather than surrender before eight years, he obtains a three-year policy loan at 3.5 percent, which he repays when his old apartment is sold.
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