Differences in Accessibility Between Life Insurance and IRA’s
“Make plans by seeking advice; if you wage war, obtain guidance.” (Proverbs 20:18)
The government did not invent life insurance. This is good news to you as an owner of some of it. Because the government did invent all Qualified Plans (such as IRA’s, Roth IRA’s, SEP IRA’s, 401k’s, & 430b’s, etc), there is a lot of nasty red tape that comes along with them. To get money out, you must pay a penalty with most and then are not allowed to put the money back in. With a current 401K, you can often take a loan up to 50% of your values, but then must pay it back on a schedule. You’re constantly reminded that this isn’t truly your money, but a trust partially owned by you and the government.
Mutual Whole Life insurance was developed for the benefit of the policy holders over a century ago. One of the guaranteed rights of the contract is that you can access your cash values. You have the right to either access the value of your cash either by withdrawing it, or by using it as collateral to get a loan from the insurance company. Theoretically, if the company was thinking about making another portfolio investment and you called up and said you wanted the money to be loaned to you instead, they would have to make you that loan instead of wherever else they might have put the money. Of course, in reality, they are working with far more money than you have and so these decisions don’t take place in real life, but that guaranteed right to access your capital is part of the contract!
Let’s look at the two ways that you can pull money from the contract. In addition to these ways, sometimes whole life policy owners leverage their ownership to get loans from outside institutions, but we’re not going to discuss that here. We’ll focus only on the guaranteed rights of the policy:
- Withdraw your cash – There’s nothing too complicated here. The cash value that you have in the policy is available for you to withdraw whenever you like. You typically always want to leave a cushion of 10% of your cash within the policy no matter how you’re pulling it out assuming that you’re not closing the policy, but you can access this money with no penalties
- Policy Loan – You can also access a pool of assets by taking a loan directly from the life insurance company. Again, this is a right that you have guaranteed in your contract. Because your loan is fully collateralized (with the cash being held by the life insurance company itself) they can give you extremely favorable terms. Many companies charge a set 8% loan rate. Some a different or a variable rate which is currently quite low.
If you choose to utilize a loan, there are many advantages. The loan will not show up on your credit and so will not affect your ability to get other loans. The repayment schedule is completely up to you. You can pay the loan back monthly, annually, when an investment opportunity comes full cycle (perhaps years later), or as late as your death when it would be taken out of your death benefit.
This can sometimes be a huge advantage because the cash value that you have within the policy continues to grow (historically at very strong rates as we’ll discuss soon). Thus you can have your assets growing within the policy and have the added benefit of putting the insurance company’s money to work for you somewhere else, all with a flexibility that does not place large demands on your cash flow. This is a powerful Velocity! For every one dollar you’ve put into the system, you are now stewarding two.
Of course, it’s important to make wise decisions with each investment. Going forward we’ll discuss a couple concepts that can make this a powerful tool such as using your whole life to become your own banker and profit yourself on financial transaction where currently the banks you work with make the banking profits on every transaction you make. We’ll also discuss ways to use this as a lower risk investment pool of funds when we discuss your Storehouse.
For now, the most important thing to understand is that your cash value is highly accessible from 3-10 days depending on how fast you need it. And the money which is withdrawn can be easily put back into the tax advantaged policy from which it came.
This is Part 4 in a series on Whole Life Insurance. You might want to read the introduction to this series which will link to each post in the explanation of whole life and Ben’s story showing how whole life is used in a variety of ways in his life.
Photo credit: lalunaeslibre