Today we’re going to talk about the logistics of a policy loan. How do you go about requesting a policy loan from your insurance company and repaying it?
Life insurance contracts typically come with a policy loan provision, which is a contractual guarantee that you have access to the money through this loan feature. You’re able to take policy loans against the cash value that has accumulated within your policy. The insurance company will place a lien against that cash value and distribute the loan. In many cases, you’re able to receive that policy loan either through a check or ACH.
The key is that you are not asking for permission or seeking approval. You are literally giving an order because it’s a contractual provision. That puts you in control of the financing function. As long as you have the cash value available within the policy, you’re able to borrow against it. It’s that simple.
There’s a reason for that. The entity that is guaranteeing the loan the insurance company is also the entity that is verifying that you have equity in the policy. They’re in a unique position because they’re holding the loan and they’re also holding the collateral. They know they’re going to get paid. Even if you die, they’ll just reduce your death benefit dollar-for-dollar for the outstanding loan.
In essence, if you die with an outstanding loan, the reality is you took an advance on your death benefit. You actually got to spend some of your death benefit during your lifetime, which is a neat feature. This is certainly unique to whole life policies. So as far as logistics how do you actually go about getting the policy loan? Usually, you’ll call up your agent or your insurance company. You’ll be able to request the loan via a form, likely online, and sometimes even over the phone. Each individual insurance company has its own rules and procedures, but typically they’ll process the loan in about a week, give or take. Once you have the loan, the next question is: how do you pay it back?
The insurance company is not going to send you a coupon booklet or monthly statements. It’s an unstructured loan, which means it’s entirely your decision how, if, and when the loan gets paid back. If you understand what we’re saying here, you’re in complete control of the payback function or the financing function in your life. That’s why people like taking policy loans.
Number one, you’re giving an order, not asking for permission.
Number two, you decide how, if, and when the loan is paid back, including what those terms are.
Now, the insurance company does determine what the interest rate is. But whether or not you pay the interest out of pocket is completely up to you. And that’s where the feature of control really comes into play. We do recommend paying back at least the loan interest, because otherwise it will accrue and compound onto the loan balance. But when it comes to repaying the loan principal, the timing and structure are totally up to you. Let’s say you’re getting a bonus in a few months and you want to pay off your policy loan. You can absolutely do that. Let’s say you want to pay $50, $100, or $200 monthly toward the loan. You can set that up too. Options include setting up an EFT (electronic funds transfer) where the insurance company automatically pulls from your bank account, or you could use bill pay through your bank to send a check to the insurance company. You can also mail a check and write in the memo to apply it toward your policy loan principal.
The cool thing about policy loans is that as you pay down the principal, your available equity inside the policy increases again. So you’ve got two hoses filling up your bucket: your premium payments and your loan repayments. That means you’re continually rebuilding your access to capital.
The key is you are in control of the payback function. But because you are in control, one of the general rules we share with our clients is this: never take a policy loan unless you have a process in mind for how you’re going to pay it back.
Even though there’s no requirement for how or when to repay it, you don’t want to leave the loan outstanding for the life of the policy. That wouldn’t be using the tool as efficiently as possible. It’s not a problem to have an outstanding loan, but it does reduce your access to capital and your policy’s overall effectiveness. For example, some of our clients borrow against their policy to invest in real estate. They flip a project that may take eight months to complete and another two months to close. Some clients will pay interest only during that time. Some won’t make any payments until the project is finished and sold. Then they repay the loan and interest all at once. Others prefer a fixed payment plan. It doesn’t matter. The point is they are in control of how it’s paid back. The bigger point is to treat your money with the same respect that you would treat the bank’s money. If the bank expected you to pay back a loan at a specific rate, do the same with your own policy loan. Respect your money. Don’t abuse it. Use it, and pay it back responsibly. Because you have flexibility, there’s a tendency to say, “Ah, it’s okay. It’s my money.” But precisely because it’s your money, you should treat it even better.
With great power comes great responsibility.
At the end of the day, if you’d like to learn more about how to use policy loans in your specific situation, be sure to check out our website at tieronecapital.com. We’d be happy to talk with you about your exact scenario. Just visit our website at www.tier1capital.com and click the “Schedule Your Free Strategy Session” today.
Thanks for reading, and remember it’s not how much money you make, it’s how much money you keep that really matters.