Life Insurance Policy Loans: The Emergency Fund Concept

Abstract

The relationship between the volume of policy loans and the level of personal incomes has, over the years, attracted the interest of life insurers and insurance academicians.' This relationship assumes more significance when policyholders' attitudes toward the savings element in their policies are also considered. According to a rather widely accepted view, an inverse relationship exists between policy loans and personal incomes. The traditional explanation is that policyholders generally regard their cash values as an reserve, to be turned to only in the most trying financial circumstances.2 It does seem reasonable to assume that a greater number of financial emergencies occur when incomes are declining. If this assumption is valid, and if the use of the policy loan provision is usually restricted to situations, there should be a greater demand for policy loans in periods of economic downturns. The concept of the emergency fund carries several important implications. First, if policyholders do, in fact, restrict