The Easy-Money Market

A loan, large or small, to an individual at 5% interest or less? No questions asked? Without putting up security? And a lifetime to repay?

Even in easy-money times, such terms would seem generous. Yet they are available to the majority of the holders of 107 million life-insurance policies (excluded are 2,895,000 G.I. policies carrying borrowing privileges at 4%). Under most state laws, insurance companies are required to provide loans amounting to almost the entire cash value of nonterm policies. The 5% interest on the outstanding principal of the loan is payable after a year. The principal itself need not be repaid, in part or in whole, until the holder dies; then it is deducted from the amount his beneficiaries would otherwise get.

In today's tight-money situation, more and more Americans are turning to this kind of borrowing. For the first six months of this year, policy loans amounted to $1,086,000,000, up 26% from $859 million in the first half of 1965. The total amount of policy loans outstanding (including those made in previous years with repayments deducted) rose 6.3% to $8,163,000,000.

This amounts to a mere 5% of insurance companies' assets. But it does disturb them, if only because it represents money that they could otherwise be investing at yields of 6 1/2% on corporate bonds or mortgages with 8% return. Thus, to finance 5% loans to holders, some companies are said to be borrowing money from banks at 6% .

Life insurance borrowing seems an attractive way for an individual to raise money. But policyholders presumably have not paid premiums for that purpose; rather, they buy life insurance for the security of their heirs. Thus, the Institute of Life Insurance recently warned against "indiscriminate borrowing which may jeopardize a family's insurance program."

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