The Advantages of Policy Loans from Non-Direct Recognition Companies
The advantages to borrowing from your life insurance company to access cash (in other words, to take a Policy Loan) are:
- Your present and future compounded cash value is not affected by the loan.
- Your death benefit and growth of future death benefit are not affected by the loan.
- Both of the above assume the loan is paid back at some point in the future.
- The loan rates are usually extremely low compared to any rate you might be able to find anywhere because it is 100% collateralized by your own cash.
- The loan can be paid off at any time simply by using your cash value to pay it off which in affect converts the money taken to a withdrawal (This does not work in reverse as mentioned above).
- This one is a bit hard to understand when you are young &/or inexperienced with using the banking capabilities of whole life insurance, but as you get older and really understand this system, you will want to utilize these capabilities more often. You will open more policies, but at some point, either because of health or because you’ve maxed out your Human Life Value of life insurance on you and the rest of your family, you will be unable to purchase anymore. At this point, you will want to continue to take advantage of the benefits of your “banking system” but might run out of ways to do so. If you had been taking substantial withdrawals along the way, you are even more limited. If on the other hand, you had been taking loans, you would have place to put money as different investments come full cycle and you come into more cash. This was the revelation we heard Nelson Nash give recently. In his book, he utilizes both withdrawals and loans depending on the circumstances, but he says that the older and more experienced he’s gotten (I believe he’s about 80 years old and owns more than 30 policies), he’s appreciated more and more the benefits of using loans so that you have a place to put found money in the future and immediately make it productive.
- Although there is a cost to the loan, it is offset by the growth of your cash value within the policy (and possibly the growth of the investment you took the money out for if that is what you used the loan for). This makes the true cost of the loan incredibly small, usually far less than inflation, and potentially negative over the long term. The loan amount will grow each year by the amount of the interest if you do not have a repayment schedule set up, which at the same time your whole life cash value will be growing within your policy. (Remember these are two very separate “accounts.”)
- If the loan is not paid back before death, it will be paid off by your death benefit with the vast majority of your death benefit going as cash to your beneficiary.
Photo credit: Planet Publishing