borrowing on life policy

i don’t get what this means and the relevance. does this mean they use the policy as collateral for a loan or what? i really have no idea.

Whole life policies have and insurance portion and a cash value portion. The cash value portion goes over the life of the policy as a part of each premium goes to fund the life (term side) of the contract and a portion to cash value. You can borrow from the cash value portion.

Also, I believe the reason for surrenders is when rates rise, the policyholder wants to cash in on the higher interest rate available with other policies offered at the new, higher rate.

right good old disintermediation, thanks guys.

On twist CFA can add – mention a no lapse guarantee policy. These policies have no surrender features and, therefore, no cash value and are not subject to disintermediation. In reality – of course, the CFA exam is “the matrix” – life insurance companies have effectively combatted the disintermediation problem by offering various guarantee features in its products. Disintermediation is considered a small risk (if at all a risk) these days.

Comment on PhillyBankers comment: In the “good old days” (when CFAI created this LOS), the typical Whole Life policy loan provison had a (relatively low) interest rate guarantee. Hence when interest rates rose, everyone with whole life policies rushed to borrow thw maximum at this low interest rate. Yes, disintermediation can include some surrenders, but that gets more complicated since the premiums for WL policies are not that sensitive to interest rates and proof of insurance might be required. Easier to think in terms of a run on low interest loans.