Policy Loans

by Wes Bridel on January 26, 2010

in Stewardship

Unlike banks, your life insurance company will always approve your loan.

Unlike banks, your life insurance company will always approve your loan.

It’s important to remember that a policy loan is a loan from the mutual insurance company from which you get your whole life policy, and not a loan from yourself (as a 401k loan typically is).  If you don’t understand this, the following won’t make much sense.  We feel like, in most cases, policy loans are the best way to access cash from within your policy.

Tax Implications: No matter how much money you take as a policy loan from your policy – you will pay no tax.

However, depending on your age and circumstances, a policy loan still might not be the best choice.  Loans are treated differently depending on the type of company your policy is with.

There are two types:

  1. Non-Direct Recognition Whole Life Policy. Your cash value continues to grow in the policy exactly as it would have had you not taken the loan.  There is no effect whatsoever on your cash value or its growth whether you have a loan outstanding or not.
  2. Direct Recognition Whole Life Policy. Companies that offer these have fixed rate loans in their contract and in order to make up for the imbalance created by an economic event which pushes short term interest rates above the trailing interest rates, the company will decrease the dividend paid to policy owners when interest rates spike.  Therefore, your dividends and therefore growth of cash value, can and will be affected by loans.

With either of these types of policies, accessing your cash value (using it as collateral to get a loan from the company) should be a guaranteed right of yours as a policy owner.  (We say “should be” because we don’t know about every company out there, but this typically is the case.)  In other words, where banks decided whether or not to give you a loan based upon a variety of circumstances including the economy, their situation, and your situation, your life insurance company can never refuse you a loan.  (Incidentally, you’ve probably heard the sad – but true – joke that banks will only give you a loan when you don’t need it.  You are contractually guaranteed to never run into this problem with a good mutual whole life company.

This post is Part 2 in the series Accessing Whole Life Cash Value. To continue with this series, click on Pt 3. To use this as a growth tool to better understand your own calling, you might start by reading Pt 1.

Photo credit: Joel Telling

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Accessing Money from a Whole Life Policy | Kingdom Calling
01.26.10 at 12:07 pm
The Advantages of Policy Loans from Non-Direct Recognition Companies | Kingdom Calling
01.27.10 at 5:02 am

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