Loans
Most life offices will provide loans to policy holders based on up to 90% of the life policies surrender value. The life policy then becomes security for the loan and the life office earns a rate of interest on the loan.
Because money is involved and the life office relying on the life policy as security they will require the borrower to prove their title to the policy and to complete a mortgage deed in favour of the life office. There will also be a loan agreement between the borrower and the life office detailing the loan amount, with a promise to repay the loan amount and the interest due thereon. As long as both life premiums and loan interest payments are made on time the life office will usually be content to allow the situation to run until the policy is subject to a claim or is surrendered or reaches its maturity date. When payments are then made under the policy the amounts due on the loan will be taken from the policy monies.
The mortgage deed would contain provisions where the borrower agreed to continue to pay the life premiums under the policy and if for any reason the policy lapsed, then to restore the life policy. The life office would retain hold of the life policy until the loan was repaid. When the loan was repaid the life office would return the policy and the mortgage deeds and reassign the policy back to the policyholder.
Life offices will usually only lend on their own polices, when a clear first charge title is obtainable. Life offices will not normally lend to those less than eighteen years of age as they do not have the full capacity to contract.
Consumer protection
There has been a trend towards consumer protection over the last decade both in the UK and the EU. One of the most important acts being the Financial Services and Markets Act 2000.