So you’ve heard of life insurance policy loans, but have you ever wondered exactly how the intricacies of policy loans work?
If you have a whole life insurance policy, there’s a contractual provision built into your contract that allows for policy loans. Policy loans are unique in that they’re unstructured, and you have guaranteed access via this loan provision. We usually recommend policy loans for our clients because they’re unstructured and they make the rest of their money more efficient.
You may be wondering how the heck could taking a policy loan make my other money more efficient. Well, there’s a couple of reasons.
First is the fact that it’s a collateralized loan. What that means is you’re not borrowing money from your policy, you’re borrowing money from the insurance company. They’re putting a lien against your policy, which means your money continues to earn uninterrupted compounding interest. It’s almost as if your money is in two places at once.
If you were going to pay cash for something and instead take a policy loan, now you still control the cash, the money in the policy is still working for you, earning uninterrupted compounding of interest and you’re paying a loan back to the insurance company. As that loan balance comes down, the amount of equity you can borrow against rises. You always have access to more and more money as long as you’re paying back the loan and the premium.
With the challenges we’re looking at going forward; high inflation paired with high interest rates, making the most of your money is important. That efficiency that you can achieve by borrowing against the cash value of your life insurance basically gives you multiple duty dollars.
The next benefit of using a life insurance policy loan is this unstructured repayment schedule, meaning you as the policy owner get to determine the amortization of that loan. You could set it up on a monthly basis for an amount that matches your budget or pays off the loan within a certain time period, or you could contribute lump sums towards that policy loan to knock it down when you have, let’s say, a bonus or a windfall of money, come in or you could pay just the interest. And it’s not required that you pay back the policy loan, although it is recommended.
Let’s say you set up the loan repayment for $400 again, that’s your decision. But three or four months into it, you realize you need more monthly spendable income. You could reduce that loan payment from 400, let’s say, to 300, or 200, or 100, or stop it altogether. Obviously, interest will accrue, and that interest is paid to the insurance company. However, it gives you flexibility within your current cash flow. That’s another key to making the rest of your money more efficient.
The insurance company is actually able to make this unstructured loan because they’re the entity making the loan as well as guaranteeing the collateral. They’re on both sides of the equation, meaning they have nothing to lose in the game. If you don’t pay that policy loan back they have the cash value. If the insured dies with the policy loan outstanding, they simply reduce the death benefit dollar for dollar because that money was technically already paid out to that policy owner.
Here’s another note on making your money more efficient. What’s the least valuable asset that you control? Wouldn’t it be a death benefit on your life? You’re never going to spend that money. But think of it this way, by using the loan feature and borrowing against that cash value, it’s almost like you’re becoming the beneficiary of your own life insurance policy.
If you’d like to get started with using whole life insurance to leverage cash value and make your money more efficient, feel free to hop on our calendar using the ‘Schedule your Strategy Session’ button, or check out exactly how we put this process to work for our clients with our web course, 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.