Life insurance often gets a bad rap when it comes to financial planning. Many consider it solely as a tool for providing a death benefit, overlooking its versatile capabilities. In this blog, we’ll delve into five lesser-known benefits that life insurance can offer, shedding light on its potential beyond traditional perceptions.
1. Credit Line Access
Did you know that your life insurance policy can serve as a credit line? Unlike traditional banks, where access to funds can tighten during economic downturns, your life insurance policy offers a unique advantage. You can tap into this credit line whenever needed, providing financial flexibility and the ability to seize opportunities that others might miss.
2. Emergency Fund Substitute
Emergencies can strike at any time, from unexpected home repairs to medical or financial crises. Instead of relying on high-interest credit cards, your life insurance policy can act as an emergency fund. Accessing this fund allows you to address urgent needs without compromising your financial stability or incurring hefty interest charges.
3. Long-Term Care and Critical Illness Support
Facing a long-term care event or critical illness can be financially daunting. Thankfully, many life insurance policies offer riders that allow you to access the death benefit to cover such expenses. While there may be costs associated with utilizing this benefit, having the option can provide peace of mind and vital financial support during challenging times.
4. College Tuition Funding
Saving for your children’s college tuition is a priority for many parents. While 529 plans are commonly used, life insurance policies offer an alternative avenue. The cash value within these policies doesn’t impact your family’s contribution to the FAFSA application, providing a strategic way to save for education without affecting financial aid eligibility.
5. Volatility Buffer in Retirement
Retirement planning involves navigating market fluctuations. Your life insurance policy can serve as a volatility buffer during these uncertain times. Its cash values, unaffected by market swings, offer stability when supplementing retirement income. This strategic approach helps safeguard your portfolio from potential downturns, ensuring a more secure financial future.
Everyone knows that money is important. But have you ever wondered how to educate your children on becoming financially literate and how to become financially free?
Most families don’t talk about money. That’s why you’ll see a situation where a parent, a father or mother, start a business and they’re really good and really focused and they’re making money and their children are spending that money. But nobody talks to the children about how to use money and what it actually means in their lives.
But what we have found is that families that are successful generation after generation talk about money. They talk about keeping it in the family. You see, money has to flow. And it’s really simple. It’s either going to flow away from you or it’s going to flow to you. What better way to keep money in the family than to have money flowing to you and less or as little as possible flowing away from you?
It’s really simple. You start policies on your children at whatever age they are, right now, and you fund those policies to a level so that when those children graduate college, there’s enough money in the policies to pay off their Stafford loans, $27,000.
And if you’re unfamiliar with Stafford loans, you get 5500 freshman year. 6500 sophomore year, 7500 junior and senior year. $27,000.
Now, here’s where the program really shines. Six months after your child graduates from college in November of the year, they graduate, they’re going to get their statements and coupons and they have to start paying a monthly payment over a ten year period to pay off the Stafford loans.
Now, in November of that year, they borrow against their cash value pay off their Stafford loans in full, and now they still have the monthly payment. They redirect the payment back to their policy. And in so doing, in ten years, the policy loans are paid off and at that point, your kid probably has somewhere in the neighborhood of $50,000 in their policy.
In and of itself, maybe this doesn’t mean much, but let’s compare it to what their roommate is doing. The roommate got the same Stafford loan, $27,000. Their parents didn’t set up a policy. So, in November of the year they graduated, they got the statement from the Stafford loan, whether it was Sallie Mae or Fed loan. And now they’re making that same monthly payment that your kid is making, but they’re making it to Sallie Mae.
Now, here’s the deal. In ten years, their loans paid off. In nine and a half years, your kid’s loan has paid off. In ten years. they have no money. In ten years your kid has over $50,000 of cash.
Whatever your child chooses to do, he or she can do because you had the foresight of number one, setting up the plan. And number two, teaching them to use the plan in a way that the money will always come back to them, Not to mention the added benefit, the death benefit. After all, we are using life insurance policies that are guaranteed on that child’s life. So should they become uninsurable down the line? They have guaranteed death benefit to pass on to their family. But you see, it’s not enough just to set up the policy. Teach your child how to use the policy, that’s the key. And that’s where we could help you.
We like to pass this information down from generation to generation. It’s not enough in our eyes to set up you to be financially independent. We want to pass those traits down to the next generation and more importantly, generations to come.
If you’d like to set your family up for financial freedom for generations to come, schedule your free strategy session where we could talk one-on-one about your specific situation.
Remember, it’s not how much money you make, it’s how much money you keep that really matters.
Have you ever wondered how people afford sending their children to college? Sometimes the first child is manageable, the second is tight. And by the third or fourth child, it’s downright impossible. Today, we’re going to talk about how to set yourself up financially to send your children to college and afford that college tuition.
The cost of college education has been rising at a rate that is significantly higher than the rate of inflation. Basically, that means that what it’s going to cost you to send your children to college is growing much faster than the income that you’re earning. But here’s the deal. If your income grows fast, that factors against you when you’re filling out the FAFSA, the Free Application for Federal Student Aid.
We call inflation the stealth tax because we don’t see it on our tax returns, but it affects each and every single one of us. When it comes to the cost of college, not every family is going to pay the same amount of tuition for the exact same school. You see, it’s calculated based on four factors: parent’s income, parent’s assets, children’s income and children’s assets. So when it comes time to send your children to college, you want to make sure you keep those numbers looking as low as possible.
But the question becomes, how exactly do you do that? How do you set your family up in a position so that you’re paying the lowest legal amount you have to your to send your children to college so that you could get out ahead in the long run?
But here’s the issue. Traditional methods of paying for college and saving for college are going to leave you pinched. Here’s a secret, 529 savings accounts count against you when it comes to federal aid application. So by doing the right thing and saving for your children to go to college because that’s a major capital expenditure, you’re actually decreasing the amount of aid that your family’s going to qualify for because you did the right thing to save for college.
If it seems like you’re damned if you do and damned if you don’t. I got news for you. That’s the way they set it up. You see, everything that served you well financially up until the point your children are applying for federal aid, will work against you going forward after the application for federal student aid.
No parent should have to choose between sending their child to their dream school and funding their own retirement. But unfortunately, that’s what it comes down to a lot of times in these college funding situations. Because you know what wasn’t factored into the FAFSA calculation? How much money parents are paying towards their own debt on a monthly basis. And clearly the amount of debt you have is going to impact not only your lifestyle, but your ability to pay for your child to go to college, especially if you plan on doing so without derailing your own retirement. There’s only so much cash flow to go around.
If you have a lot of debt payments, there’s only so much leftover at the end of the month. What happens is a lot of parents are forced to decrease their retirement savings at the time they’re sending their children to college so that they’re able to finance the cost of college tuition.
Here’s the solution.
You really should be looking at ways to make your money more efficient because the more efficient your money becomes, the better prepared you are to take on or tackle this increased expense of sending your child or children to college.
At Tier 1 Capital, we look at things through the lens of control. Are your financial decisions putting you in more control of your cash flow and assets or in less control of your assets? Whoever controls your cash flow controls your life.
No parent wants to stand in the way of their child pursuing their dreams but we see so many times where children have to make a decision between almost bankrupting their parents and pursuing their dreams.
So what are some practical steps you could walk away with and apply?
Number two would be to build in flexibility to your plan. First, you find the inefficiencies, regain control of that cash flow, and then save in an area where you own and control. And the importance of that is the flexibility to send your children to college to pay for vacations, to pay for any expenses that come up, and then eventually also use that money to retire without the restrictions placed on accounts by the government for example.
Remember, it’s not how much money you make, it’s how much money you keep that really matters.
The most recent word on the street is that student loan repayments are going to begin again in October of 2023. What does that mean if you’ve been spending that money instead of saving it or paying toward your student loans all along? Well, basically, it could mean that you’re going to experience a cash flow pinch. Between inflation, high interest rates and now an extra debt payment it’s all about cash flow. Whoever controls it, controls your life. Let’s talk about how to create some cash flow relief and set yourself up for a better financial tomorrow.
They call inflation the stealth tax because it’s not written in the tax code, but it affects each and every single one of us. Some more than others. And recently, the costs of goods and services has been increasing at a faster pace than our income can keep up with.
According to the Federal Reserve, in the last quarter of 2022, consumer debt increased by $6.1 billion, which was one of the highest recorded quarterly increases. And that’s just in three months. This is proof that the cost of living is increasing faster than our income. If you don’t have the cash flow built in, it makes sense just to obligate your future income and put it on the credit card.
However, with student loans coming due and yet got another bill that we’re going to be responsible for, how are we going to fit this into our cash flow? This is why it’s more important than ever to make your money more efficient. You see, there’s only so much revenue coming in. There’s only so much income coming into your household or coming into your business. It doesn’t make sense to be using your money inefficiently and wasting the control that you had over that money. That’s why our process is more important today than it’s ever been, because we show you how to regain control of your money.
What that looks like is looking at your cash flow for areas of wealth transfer. Areas you’re giving away control of your cash flow unknowingly, meaning you’re not aware of it and unnecessarily, meaning it can be corrected. And once you’re able to identify those wealth transfers, you could start saving in an area where you own and control, so ultimately, your goal could be to regain the finance function and control of that finance function in your life so that you’re less dependent on banks and credit companies for access to capital in the future.
You see conventional wisdom teaches us to save in areas where we don’t control that cash flow. Let’s take a look at a 401k, for example. Yes, we’re saving for retirement, which is admirable. However, when it comes to making these small milestones along the way, we don’t have access to that money and we certainly don’t have access to it without paying taxes, and a penalty in most cases.
You might be saying, “Hey, I’m using my money very efficiently.” Well, this is where the problem is. If you’re implementing conventional wisdom or traditional financial advice, in all probability, your money is inefficient. When we say inefficient, what we mean is your money is not accessible when you need it for whatever you need it. No questions asked. If your money is inefficient and inaccessible, that can create some huge financial problems.
I would argue that most financial struggles come from not having access to money when you really want or need it. Take, for example, when student loans are coming due. Imagine if you had access to money, instead of feeling pinched, you can have some cash flow relief built into your system. Flexibility is key when it comes to these issues.
If you’d like to learn exactly how we help our clients to become more in control of their cash flow and their assets Check our free web course that lays out exactly how we put this process to work, The Four Steps to Financial Freedom.
Remember, it’s not how much money you make, it’s how much money you keep that really matters.
When it comes to funding college tuition for your children, sending one child to college is expensive, sending two is almost manageable, and sending three could be downright impossible.
The cost of college for your family is based on a calculation done by the government. It’s calculated using the parent’s income, the parent’s assets, the children’s income and the children’s assets. The more you make typically, the more you’re going to spend.
So when you’re sending your first child to college, it’s pretty expensive. And when you get into sending multiple children to college, it could not only be expensive, but it could also totally derail the retirement plan for the parents.
And on top of that, we have the issue of fairness. You see, from what we’ve seen from our experience, the youngest child usually gets shortchanged. The oldest child has the most money because, let’s face it, the grandparents, the aunts and uncles, they all put money aside for the future of the first child. Not to mention they’re first in line. So they get first dibs on Mom and Dad’s cash flow.
Did you notice in the four factors you use for the FAFSA calculation? Not a single one of them had to do with the parent’s debt. So if the parents have a lot of debt, whether they be car payments, mortgages, boat payments, credit cards, that doesn’t factor it all into the formula for college aid.
But now we have the issue with each child, as we go down the ladder, there’s usually less money set aside for the younger ones, and the youngest usually has the least.
So there are a few factors to consider here. Number one, is your child picking their college or are the parents setting guidelines on what they’re able to afford for each of the children? Number two, how much money is being set aside for each of the children, and is that sustainable throughout the life of the parents? And is that enough to get your children through college without derailing your retirement income?
A lot of times parents that we see are faced with the choice of sending their children to their dream school or funding their own retirement income. No parent should have to make that choice.
So what’s the key? What are the keys to setting yourself up for college success to make sure your children could be successful and you could retire someday?
Well, the first is to start saving and to start saving early. Ideally, you want to be putting away 20% of your income and living within your means so that you’re able to fund college but also live comfortably.
But let’s face it, there’s only so much cash flow to go around 20% sounds great, but how in the world can you do it when you’re struggling to get by today? And you know that somewhere down the road your children are going to want to have the opportunity to go to college. And college isn’t getting cheaper as time goes by.
Well, the key is to start where you are. Start saving what you can and start saving it on a consistent basis. And then as you progress and maybe you get a raise, you’re able to save more and more towards your goals. And that’s where we can help you. We help people identify where they’re giving up control of their money unknowingly and unnecessarily.
If you’d like to learn exactly where you’re giving up control of your money and how you could make it more efficient, check out our college page on our website, where we go through a deep dive of how we use this process for our clients.
And remember, it’s not how much money you make. It’s how much money you keep that really matters.
Do you realize we finance every single purchase we make? We either go to a bank or finance company and pay up interest, or we pay cash and we give up interest. But if you’re paying cash, I’m sure your intention isn’t to give up control of your money, or isn’t to lose opportunity cost.
Today, we’re going to talk about how you could still pay cash for things without giving up opportunity costs and without giving up control of your dollar.
You may be familiar with the two main ways of financing any purchase. The debtor, who digs a hole and fills it up and just fights to get their head above the horizon, that zero line. Or the saver, who is kind of the debtor in reverse. They save up money as a matter of course, but once they have enough to make their major capital purchase, they drain the tank and they give up the opportunity cost of the money that could have been earned on their assets.
In both situations, the debtor and the saver spend a lot of their time at the zero line. They don’t get to experience any of the benefits of compound interest. You see, when you’re in debt, your cash flow is obligated to filling in that hole, to getting back up to that zero line. But when you pay cash, you’re still married to that zero line, you’re still saving as a matter of course, but you’re not really getting ahead because once that purchases made, you’ve traded your cash, that you owned and controlled, for the asset for the purchase, whether it’s a vacation, whether it’s a home remodel, it doesn’t matter. All of that cash is gone because you made a purchase.
But that can’t be what the wealthy are doing, right?
What wealthy people do is really simple. They create, cultivate, and keep their money. They keep in control of their wealth as long as possible. Now we have this question, if I want to make a purchase, we don’t want to finance and we don’t want to pay cash, how can I make the purchase?
With this product, we’re able to leverage against our cash value that has accumulated within the policy, without giving up the compound interest. In essence, we’re able to take back the finance function within our own lives.
The key thing here is that we still get to make the purchase. We can make purchases for our own life, whether it’s sending our kids to college or paying for their tuition or paying for a wedding or a down payment on the house. The options are literally limitless.
What this extra step adds is a way to finance these purchases using your own money, without giving up control of the money, without being penalized by taxes, and without being dependent on banks and credit companies.
Not to mention without having to drain down the tank and giving up opportunity costs on our money or without having to give up control of the process. We give our clients a choice. You can either be controlled by the process or be in control of the process. Which would you rather?
I would argue that most financial frustrations come from not having access to money when we really need something. When you have access to cash, it seems like opportunities naturally find you. So whether it’s a business endeavor or an investment opportunity, the options are limitless as to why you should use this cash for. And when you’re able to take advantage of an external opportunity, you’re able to earn an external rate of return on your money, as well as the internal rate of return on your money.
So how does this play out? Well, you start a policy, you build up a pool of cash that you’re able to access and repay because you own and control that policy. And it’s a matter of course, you’re a saver. You’re always saving money. You’re always being an honest banker and paying yourself back. Then you’re able to leverage that money for retirement on a taxpayer basis and the leftovers get passed on to your family on a tax favored basis.
Number one, the cash value grows on a tax deferred basis.
Number two, you’re able to access the cash value on a tax free basis through the loan provision.
Number three, when you die, the life insurance death benefits pass outside of federal income taxes to your name beneficiary. And also, in most states, the death benefit is outside of state income tax and usually state inheritance tax.
So let’s summarize. Number one, you get to make the purchase. Number two, your money earns uninterrupted compounding of interest. Number three, you’re in control of the process. Number four, numerous tax benefits.
With the new year comes New Year’s resolutions. What are you doing for your finances this year that’s going to leave you in a better position on December 31st than you are right now? And before you answer that question, if you say you’re going to do the same thing you did last year, why would you expect different results? Today, we’re going to talk about how to set your New Year’s resolution to leave yourself in a better position financially.
When it comes to finances, it’s important to keep it simple and consistent. What could you do this year to leave you in a better position than you are currently? Is it something as simple as making a budget and sticking to it? Or have you been saving but know you need to be saving more? Or have you been saving enough but not saving in a place where your money is accessible to achieve your short-term, intermediate, and long-term financial goals? Now is a great time to take a look at what you have been doing, what has been working, and what hasn’t been working so you could reach all of your financial goals without feeling strapped for cash.
This takes us to the beginning, which is basically understanding what your goals and objectives are. One of the biggest financial mistakes we see people make is really simple – their strategies are not aligned with their goals. So maybe your goal is to expand your business this year. What are you going to do to help achieve that goal? Or maybe you’re getting ready to send your children off to college? How are you going to achieve that goal without pinching your current and future lifestyle? It’s important to take a look at these things because missteps could have effects for years and years and years all the way into your retirement.
We always tell folks,
Every splash and every move you make financially has a ripple effect. It may not be apparent today, but at some point the piper has to be paid.
A great example of this is getting out of credit card or student debt. What’s the best way to accomplish this goal? We’ve covered this in several videos, but one piece of advice I could give you is to make sure you’re saving along the way. What if there was a way to begin saving while paying off your debt simultaneously? Would you want to know about that technique? And this goes back to what we had said in a previous video, how can you put your savings or pay yourself first on subscription mode? One way we’re able to help our clients and ourselves is by using a specially designed whole life insurance policy designed for cash accumulation to help meet all of these goals when it comes to paying off debt. By putting your savings on subscription mode and building up a pool of cash that you have access to in this whole life policy, you’re then able to access that cash to pay off high-interest credit card debt or student debt and then repay yourself and rebuild that cash value within your policy so that you don’t have to jeopardize your savings to pay off debt.
Another example is to utilize this tool to expand your business. But like we always say, it’s not what you buy, it’s how you pay for it. So whether it’s paying off a credit card, paying off some other debt, expanding your business, or taking advantage of an opportunity, either way, you’re buying something. If you’re using the right process to make that purchase, you will always be building wealth everywhere along the way. So you’re not taking that money out of circulation. You’re just utilizing it or repurposing it or deploying it somewhere else so it can get you another rate of return.
A lot of times when people are thinking about financial goals, they’ll think of long-term goals like a down payment for a house, retirement, or sending their future children to college. But it doesn’t have to be that complicated. Looking at what goals you have for this calendar year is a great feat.
It’s not what you buy, it’s how you pay for it. Make sure that how you’re using your money is going to be moving you forward not only for your short-term goals but your intermediate and long-term goals.
One of the biggest mistakes that you could avoid is wasting opportunity cost. Something that we always say is you’ll never see the interest you don’t earn. Every time you drain your savings and drain that tank, you’re losing so much opportunity cost and you’ll never realize exactly what effect that’s having over your lifetime. We call that the cash trap. When you buy something and pay for it with cash, you think you’re winning because you’re not paying interest. Unfortunately, you’re also giving up interest and people don’t realize that that’s the opportunity cost. Every purchase you make has a cost. You’re either going to pay interest if you finance or you’re going to give up interest if you pay cash. It’s pay up or give up. That’s why we say it’s not what you buy, it’s how you pay for it that matters.
If you’d like to get started with your financial resolution for the New Year and put your savings on subscription mode, we’d be happy to help you meet your goals. Feel free to schedule your free strategy session right here on our website. Or if you’d like to learn exactly how we put this process to work for our clients, be sure to check out our webinar, The Four Steps to Financial Freedom.
And remember, it’s not how much money you make. It’s how much money you keep that really matters.
A lot of times when people come to us, they have short term financial goals that they’d like to accomplish using a specially designed whole life insurance policy designed for cash accumulation. But the real magic tends to happen as these policies mature.
There are certainly a lot of reasons why you could use a specially designed whole life insurance policy, designed for cash accumulation on a short term basis to achieve your short term financial goals, like getting out of debt, sheltering money for your children’s college education, or just regaining control of your cash flow.
As with any whole life insurance policy, a policy specially designed for cash accumulation, the insurance company is making two promises. The first promise is that should you die while you own the policy and you’re the insured, the insurance company will pay your beneficiary the death benefit.
The second promise is simple at the age of maturity, which is typically age 121, the insurance company is going to have cash set aside equal to the face amount of the policy. So what does that mean? Well, year after year, the insurance company has to build up the cash value in that whole life policy. So they could make that second promise. By making that second promise, by having the money available at the age of maturity, the policy gets better and better and better with each passing year. The longer you have the policy, the better it gets.
You see, these policies are actually designed to build cash value over time, and that’s not counting any paid-up additions riders or dividends on that policy. When we design a whole life policy for cash accumulation, we add on paid-up additions riders which are going to increase the cash value availability in the early years of the contract. And we’re placing these policies with mutually owned life insurance companies.
When you purchase a policy with a mutual insurance company, you are literally the owner of the company as it relates to the profits or the profitability of your policy. And what does that mean? That means any profits the insurance company makes on your policy will be returned to the owner, you. And they do so in the form of tax deferred dividends.
You see, in life insurance a dividend is literally a return of overpaid premium. When you use those dividends to buy paid-up additions or paid-up additional life insurance, those dividends accrue on a tax favored basis. By designing the policies with the paid-up additions rider and with a mutually owned life insurance company, you’re able to turbo charge the access to cash in your policy. And as your cash value grows, your access to cash is going to increase and you’re going to be able to access more and more to achieve bigger and bigger financial goals for you, your business and your family.
So in the short term, you can get out of debt quicker. You can save for your children’s college or use it to make major capital purchases. But as time goes by, you get greater access to cash, greater annual increases in cash, and greater death benefits.
Nelson Nash’s number one rule was to think long term. He was trained as a forester. He thinks 70 years in advance and like Nelson would say, I may not be here and neither may you, but somebody is going to be there and they’re going to reap the benefits of our good decisions today. But the long term benefits of using a specially designed life insurance policy could never be counteracted. You see, these policies could allow you tax free access to cash value to accomplish your financial goals, tax deferred growth within the policy, and a tax free death benefit to your family when you die.
If you’d like to get started, with a specially designed whole life insurance policy designed for cash accumulation to accomplish both your short term and your long term financial goals, be sure to visit our website at Tier1Capital.com to schedule your free strategy session today. Also, if you’d like to see exactly how we put this process to work, check out our Four Steps to Financial Freedom webinar.
And remember, it’s not how much money you make. It’s how much money you keep that really matters.
So you’re ready to request a policy loan and you’re wondering exactly what’s going to happen. You may be wondering how do you request a policy loan and what does that look like? It depends on the company. And some companies allow you to request a policy loan via a phone call, a physical form, or a web form.
Now, a key distinction between a policy loan and a regular conventional loan is that you’re not asking permission to access this money within your policy. You’re giving an order to the insurance company. You’re saying, “Hey, I have cash value in my life insurance policy, I have equity. I’d like to take a loan against that equity, send me a check.” And they’re saying, “Oh, I’m checking this money. You have it. Here you go. Take the loan and we’ll talk to you later.”
A policy loan will not reduce or go against your credit score. And whether or not you make a payment or you’re late on a payment on a policy loan won’t affect your credit score. Again, you’re giving an order versus asking permission. This is a big deal when it comes to, let’s say, losing your job or becoming disabled, because when you’re applying for a loan conventionally in these circumstances, you’re asking permission.
You’re going to the bank or the credit company and you’re saying, “Hey, this is what I have. Can I have some money?” And they’re going to say, “How are you going to repay it? Can you prove that you can repay this money? And if not, they’re not going to allow you access to their capital.” But with a policy loan, that’s irrelevant.
You see, the key here is that the entity, the life insurance company that is giving you the loan is also the entity that’s guaranteeing the collateral. They’re actually figuring out how much equity you have in your policy and loaning to you against that equity. It’s called a collateralized loan. Not only is it a collateralized loan, but it’s also an unstructured repayment schedule. And what that means to you as the policy owner is there’s no payment schedule set up for you.
A lot of times clients will come to us and say, “Hey, I have X amount of money to put towards my policy loan per month. How long is it going to take?” Or, “Hey, I want to pay off this policy loan in two years or five years. How much do I have to pay to accomplish that goal?” And you see, this is key because being unstructured or having an unstructured loan repayment allows you to pay back the loan within your cash flow. You’re not pinching your cash flow to fit into the amortization schedule or the terms and conditions that a bank or a credit company gave you. You’re literally fitting the monthly payment into your cash flow to accommodate your life, not somebody else’s.
There’s a delicate balance between paying your policy loan back too slowly and paying your policy loan back too quickly. When you pay back too slowly, you run the risk of the interest accruing and not covering the interest expense. And what happens is if you don’t pay it at the end of your policy year, it gets tacked on to the balance.
However, when you pay yourself back too quickly for your own cash flow, you do have the option of just taking another policy loan so you feel less pinched going forward. But the key is now you’re in control and you make the decision as to how soon or how long it takes you to pay back the loan. You also make the decision if you want to take another loan. The key benefit of repaying your policy loan is freeing up that cash to be available for you and your financial goals in the future.
Another thing that happens when you take a policy loan is uninterrupted compounding of interest. Now, this only occurs with certain types of companies. They have to be mutually owned by the policy holders, and they need to recognize non-direct recognition so that dividends aren’t affected by a policy loan balance. But the key is your money is continuing to grow at the same pace that it would have had you not borrowed. So the only cost is the interest cost.
Basically what this means in plain English is that your policy will continue to grow the exact same way with the policy loan as if there was no policy loan at all. So your money could in essence be in two places at one time because you never drained the tank. The money is still within your life insurance policy, but you have a separate loan where you have access to that money to accomplish your financial goals, whether it be taking advantage of an opportunity, paying off your debt, or sending your kids to college.
And that’s the key. With a collateralized loan, your equity stays in the policy. The insurance company puts a lean against your equity, and they give you a separate loan from their general account. And as you pay that loan down the equity increases, it’s really that simple. Because a policy loan is a collateralized loan and your money continues to grow uninterrupted compounding, you’ve literally tapped into what’s known as multi duty dollars. It’s as if your money is in two places at once because quite frankly, it is. Your money still growing in the policy as it would have had you not borrowed and you were able to obtain a loan to do whatever you want, whether it’s to make an investment or to pay a bill or to pay off an emergency. Talk about efficiency.
When you take a policy loan, you’re taking a collateralized loan against the cash value. But think about this. You still have all the benefits of your life insurance policy. Now, the death benefit is reduced dollar for dollar, but you still have that death benefit. You may have other riders like a terminal illness, a critical illness, or a disability waiver of premium. Plus, you’re able to use that loan for whatever you want. Maybe it’s growing your business, maybe it’s taking advantage of a market opportunity or investing in real estate or anything else that you may see as an opportunity out there.
So this is what we mean when we’re talking about multi duty dollars. Your money is in the policy. It gets all the benefits of the policy, the death benefit, any additional riders. And you’ve used it to either make an investment, take advantage of an opportunity, or to clean up an emergency.
When you’re thinking about taking a policy loan or you’ve taken a policy loan, keep these issues in mind.
Number one, you’re giving an order, not asking permission.
Number two, unstructured loan repayments, which means you can pay it back within your cash flow and on your timetable.
Number three, uninterrupted compounding. Your money continues to grow as if you never tapped into it.
Number four, multi duty dollars. You’re getting $1 to do the job of three, four or sometimes $5.
You see, it’s all about maintaining control and efficiency of your cash flow and your money. You want to maintain complete liquidity use and control of your money so that you’re able to continue to grow the money and still accomplish your goals like sending your kids to college or taking advantage of opportunities.
If you’d like to get started with a specially designed whole life insurance policy designed for cash accumulation and put this process to work for you, be sure to visit our website at Tier1Capital.com to schedule your free strategy session today.
Have you heard about life insurance policy loans and wondering what they are and how they work? A policy loan is a collateralized loan against the equity or cash surrender value in your life insurance policy. And this is a key distinction, because several times I’ve spoken to people who were misinformed, on exactly what a policy loan is.
They were told that a loan against your policy is a loan against the death benefit, that is technically not correct.
Although policy loans will decrease your death benefit dollar for dollar if you’re to die with a policy loan balance, it’s technically collateralized against the policy cash value. And this is a big difference because you don’t have access to that full death benefit while you’re alive, but you do have access to the amount of cash value that has collateralized and built up in your policy throughout your policy years.
Now, it doesn’t matter which insurance company you’re working with as long as you have a cash value building life insurance policy like a whole life universal or variable universal life policy, you have access to the policy loans via the policy loan provision included in those contracts.
So the next issue with policy loans is when or how soon can you take a loan or borrow against the equity of your policy? And the answer is it depends. It depends on the company. Some companies allow for loans after ten days or within the first 30 days. Other companies discourage policy loans in the first year.
It’s important to address these questions before placing your policy in force, because the last thing you want to do is plan on using that policy value during the first year and not have access to it to accomplish your short term goals.
The next question is how much cash are you able to get your hands on and that again, depends on the policy. If you have a policy designed for cash accumulation, typically it has some type of rider and the rider allows you to build up that cash value quicker so you have access to it sooner.
You can expect about 85 to 95% of the contribution that’s going towards the rider to be accessible immediately. However, if you have a regular or whole life insurance policy or other permanent life insurance policy, there’s likely some cash value in it, especially if you’ve had it for several years. And typically you could get your hands on about 90% of that cash value via the policy loan.
So you’ve decided that you’re ready to take a policy loan. How do you go about accessing that money? Well, it’s real simple. You’re giving an order to the insurance company with either a form, a phone call or going online and requesting that policy loan. They’ll either send you a check or put the money right into your bank account.
But then the next question becomes, how do you pay that loan back? And do you have to? You see, life insurance policy loans are unstructured loans, which means there’s no coupon booklet or payment schedule that goes along with the loan. It’s completely up to you as to when or whether you pay the loan back.
And the reason is the entity, the insurance company that is making the loan is also the entity that is guaranteeing the collateral, the equity in your policy. The insurance company is literally verifying to themselves whether or not you have equity in your policy. As the equity appears or when you have equity, the insurance company can release that money to you through the loan provision. Since it is a loan, a separate loan from the insurance company against your cash value, the policy loan will accrue interest.
And what that means is basically on your policy anniversary, the insurance company will send you a bill for interest if you have a loan outstanding. It’s typically anywhere between 4 and 6%, maybe a little more, maybe a little less, and it can fluctuate.
But every year you’ll get that policy loan interest bill and you have the option to pay it. And as long as there’s enough cash value within the policy, you don’t have to pay it and it will accrue onto your loan balance. But we do recommend that you at least repay the loan interest so your loan balance doesn’t continue to grow year after year.
And this is important, you understand, because the loans are unstructured, the decision to pay back the interest or to pay back the principal is completely yours. The interest is charged, but the decision to pay it is yours. And that’s why we utilize policy loans to help our clients regain control of their money.
Now, you may be wondering why would you want to pay that policy loan back? And the answer again is control. As soon as you pay that policy loan back, you’re releasing equity within that policy. So you’re able to access that money again in the future.
This is very different than when you’re repaying your loan to, let’s say, a credit card or other loan, because once you give that payment to that other entity, you no longer have any access or control or you’re giving up opportunity costs on each one of those dollars.
You see with policy loans if you take a policy loan, this becomes your loan balance. Your equity is reduced dollar for dollar by the loan balance. Every payment you make on the loan reduces the outstanding loan balance and increases your equity. And that’s the key. Now you control that money because you’re the owner of the policy. You could ask for another loan, and another loan, and another loan, as long as there’s equity you can borrow.
Now, at this point, you may be wondering, what do people use policy loans for? And there’s a variety of reasons. We have people who are buying real estate, investing in their business, doing other investments in the marketplace, earn an external rate of return as well as their internal rate of return within the policy.
We have other people who are trying to get out of debt and they’re building their savings in the policy and also getting out of debt simultaneously. And what this allows to happen is they’re able to get out of debt often faster and still build their savings within the policy so they don’t have to put themselves in that situation going forward.
Another reason why people would borrow against their life insurance cash value is to create a volatility buffer against their retirement portfolio. We’ve done a previous video that explains how a volatility buffer works, but real simply, instead of taking money out of your retirement portfolio in the year that the market is down, you would forgo taking money out of that account, borrow money against your life insurance to supplement your income and give your portfolio an opportunity to regenerate or regrow itself.
Another great use of policy loans could be sending your children to college and funding the tuition through the policy loans. Did you know that accessing money from your life insurance policy and building that equity within your policy is completely off the FAFSA calculation in most cases?
Another reason why people would take a policy loan would be to buy a car or to remodel their home. And finally, for a medical or financial emergency, you see the key in life is having access to capital. And one of the things about life insurance, cash values is that money is liquid and you can use it and you control it. We call it liquidity use and control or “the luck factor.”
If you’re ready to get started with a whole life insurance policy designed for cash accumulation or could use some more guidance on using your existing life insurance policy, be sure to visit our website at Tier1Capital.com.
