When a life insurance contract is issued, a lot of times there isn’t a lot of built in flexibility within the contract. So when people come into windfalls, whether it’s an inheritance, a bonus at work, or a raise, and they have extra money and want to put it into the policy, you may be wondering where does it go? How do we get this money securely in our life insurance contract?
When people come to us and say, “Hey, I have a windfall of money. I got a bonus at work, an inheritance, a raise. I need to put this money somewhere and make it as efficient as possible.” We’re trained to look at things through the lens of control with full liquidity use and control of that money along the way for your upcoming financial goals, as well as your ultimate goal of retirement and leaving a legacy to your family.
If you already have a life insurance policy, you may be wondering, How do I put that money into the policy in the most efficient way possible? We call this a hierarchy of policy payments.
First and foremost are base policy premiums. In the early years of your policy, your cash value will not increase as much as the premium you deposit into the policy. However, as time goes by, the policy becomes more efficient as far as the base premium is concerned, meaning that your cash value increase can be as much as two, three, four, five, and I’ve seen it as high as eight times the premium.
You see, these policies are designed by actuaries. These policies are required to get better and better every single year. So by funding that base policy, you’re ensuring you’re going to get the most bang for your buck over the long term. It’s not a get rich quick scheme.
The second place in order of hierarchy is to pay the paid up additions rider. This will allow you to maximize the efficiency of the policy, get you the biggest bang for your buck as far as contribution and cash value increase, as well as putting you in a position to solve your short term, mid-term and long term goals.
Now, with the paid up additions rider, it has to be issued with the contract. If you have a contract that doesn’t have a paid up additions rider or a contract that already has the paid up additions rider that’s paid up, meaning you can’t put any more in it, you’re not going to be able to get around that without additional underwriting.
Many policies that are designed specifically for the infinite banking concept or for cash value accumulation include a paid up additions rider of some sort that goes from 4, to 10, to many years beyond. However, it will be determined by the terms in your specific contract.
The third order in the hierarchy is to pay the policy loan interest, assuming you have an outstanding policy loan. If you do have this, the third place in order of hierarchy is to pay the policy loan interest. You state policy loans are unstructured, meaning there’s no repayment terms.
However, with a life insurance policy loan, typically you’ll receive a bill for the loan interest somewhere around your policy anniversary each year. Now you do have the option of paying it back. But if you don’t, it’ll accrue right onto the loan balance. Assuming there’s enough room in the policy to absorb that loan interest.
And that brings us to the fourth and final area in the hierarchy, and that is to pay the loan principal. You see, as long as you’re paying the premium and the paid up additions rider and the policy loan interest when you pay off the loan really doesn’t matter. That’s a personal issue.
You can make the repayment program fit to your cash value or to fit to your needs. And once you decide how you want to pay it back, you can change your mind as far as how you want to pay back that loan in mid-stream, so to speak, and make it a longer repayment program or a shorter repayment program based upon your cash flow.
If you recently came into money, whether it be from an inheritance, a bonus at work or a raise, you may be wondering how you should be applying that to your life insurance policy. Well, there’s a specific hierarchy, an order in which you should be applying these payments to your policy. The first is towards your policy base premium. Number two, policy paid up additions, if applicable. Number three, if you have a policy loan, you should be paying off your policy loan interest. And number four, and the final place you should be putting money is toward your policy loan principle.
Now, if you have the first three tiers of the hierarchy taking care of: the premium, the paid up additions and the loan interest, taken care of, it may make sense in your situation not to repay that policy loan and instead take out a new policy so you can have two policies working, compounding and growing for you simultaneously.
You see, when it comes to compound interest, like is experienced in these life insurance policies, there are two factors time and money. And if you have the money, we know that you could never cover the time. So the best time to start a second policy may be right now.
If you have a windfall and you’re looking at ways to apply the windfall to your life insurance policy, schedule your Free Strategy Session today.
And remember, it’s not how much money you make. It’s how much money you keep that really matters.
