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Borrowing against the cash value of life insurance is a very hot topic. Many do not understand how it works and many more, who may think they understand it, have been misled to believe it has magical powers. I want to clarify this misconception and give you a straight answer.
Cash value is the value assigned to the policy by the insurance company. This cash value can do many things but for the sake of this article, we are just going to talk about the borrowing aspect only.
Many think the money itself is borrowed as if that money is physically removed from the policy. That is incorrect! Look back at my first two words, “borrow against”.
When you, the owner of the policy, asks the life insurance company for a loan from cash value, they do not physically remove that money from your cash value. Instead, they use your cash value as collateral and send you their money. The insurance company has a pool of money set aside just for this purpose. When they do this, they, in turn, charge you an interest rate for using their money. The best part of this is your money has remained in cash value, continuing to grow (by earning a guaranteed rate) all while using the companies money!
In simple terms, your money continued to grow while you were able to use someone else’s money.
Interest Charged by the Company
Now some people have been led to believe the interest is paid back to the company increases their cash value. This is not true, the insurance company keeps any interest they charge you. Let’s say the insurance company charged you 5% interest on your loan. Then all 5% of that interest money goes back to the insurance company as a profit to them. No different than interest going to a bank as profit.
Now, if you are practicing the Infinite Banking Concept and pay back that loan at 7% then YES 2% of that interest goes back to you because it’s above what you were charged by the company.
Many people get upset because the company charges them to use their money. If this is you, then you better be upset with the local bank as well. You put money in savings and then go get a loan, they just lent you your own money at a much higher rate than what they are paying you on your savings account.
We have established the basics now and the next question is always, when does it have to be paid back by? The answer to that is yet another luxury of this infinite banking concept. The life insurance company does not set terms and conditions for that money to be paid back, that decision is left up to the owner to decide upon.
Now don’t go thinking the money doesn’t ever have to be paid back, it does. When you are young, it is imperative the policy loan gets paid back. However, if you decide to make payments over ten years instead of five that is ok. If you decide to pay it yearly instead of monthly, that is ok too. Just be an honest banker and pay that loan back.
The life insurance company does not worry about an outstanding loan because they have your death benefit as collateral to that loan repayment. There is one thing in life that is for sure and that is death. The life insurance company knows death will occur at some time. So, for example, there is a $50,000 loan against cash value and the death benefit is $250,000. Upon your death, the heirs would get $200,000 and the life insurance company will keep the other $50,000 for repayment. It is a secured loan, what institution does not like a secured loan?
I instruct my clients if you can’t make a payment on the loan at least pay the interest for that year. You do not want to keep interest accumulating as it could increase to unsustainable levels.
Even better yet, if you used the cash value to make all your purchases, all your debt be in one spot. Then upon death, the heirs would get the remaining death benefit and be debt free! It makes for a very clean place to have debt. No banks coming after the heirs at a time when they are dealing with much bigger things and mourning the loss of their loved one.
In summary, borrowing from a policy is a great living benefit, but it is not free money and you do have to be responsible.
Working with a certified Infinite Banking expert is so important when you take policy loans. This is not something to blow off. You must understand how it works as it IS the most important part of the infinite banking concept.
This should have cleared up some of the questions you had regarding policy loans and repayment. If it has not please feel free to contact me for more clarification.