Borrowing from your company-paid 401k is a benefit that many are using to fund life’s necessities, so I occasionally hear, “Why do I need to put money into a life insurance policy when a 401k offers me the same benefits?”
These “benefits” through a 401k are hardly the same as a whole life insurance policy, the difference may seem little now but as you read on you will soon notice this is a huge difference.
These are 8 differences you need to know…
1. When borrowing from your 401k, the money is removed from the market and placed into a side fund. This means the money no longer has the ability to earn any kind of interest on while you are using it.
WLI: You borrow against the money in your policy which allows your money to remain in the cash value account earning interest all while you are using it.
2. Payback terms are set to a 5-year time frame and automatically taken from a paycheck. (Unless the loan is for a home then the terms are longer than 5 years.) Payback terms can not be changed or stopped.
WLI: The borrower determines the rate at which the loan will be paid back, the amount of each payment and payback terms can be changed at any time.
3. If employment is terminated while a loan remains outstanding it has to be paid back in full within 60 days. If the loan is not paid back the loan amount has to be claimed as income and a 10% penalty will be applied. (standard in most plans, but this penalty may vary)
WLI: Is not connected to employment which allows for more flexibility. This is great since the average length of employment is now 4.5 years with an employer.
4. 401k loan rules are confusing. Some plans may only allow you to take one loan in a 12-month period of time. If your plan does allow for multiple loans, figuring the maximum amount you can borrow isn’t as simple as subtracting your current loan balance from the maximum you’re allowed to borrow. Instead, your maximum loan amount is based on the highest outstanding balance you had on your loans in the previous 12 months. For example, say your plan allows loans up to the IRS maximum, and you have one loan outstanding for $20,000. If the balance was $35,000 11 months prior, those $15,000 in payments won’t be considered for your loan application. You’ll be allowed to borrow only a maximum of $15,000, or $50,000 minus $35,000.
WLI: Whole Life Insurance loan rules are simple. Any number of loans can be taken within a year’s time as long as there is cash value available to borrow against.
5. You only have access to half of your money. The amount available to borrow is up to 50% of your vested amount or $50,000 regardless if that loan has been paid back or not.
WLI: Policy owners have access to 90-95% of their cash value and are able to borrow against that entire amount.
6. Control rules are complicated. Some 401k plans may require consent from the spouse before money can be borrowed.
WLI: Control rules are simple. NO consent is needed from the spouse or beneficiaries, the owner has100% control.
7. Any loans on 401k’s are counted as a loan on lender loan applications.
WLI: Cash value loans are not subject to lender disclosure.
8. Old 401k plans normally do not allow owners the ability to borrow from it.
WLI: Cash value is available to borrow against regardless of the age of the policy.
As you can see these 8 differences are reasons you should consider a new way to prepare for retirement unless you’re ok with the government’s ability to handle your money. One never knows what is going to happen in life and having control of your money should be a priority.
SIDE NOTE: Have you ever researched how much of your 401k contributions are lost to fees? This answer surprises all of my clients. Get the answer here in this 401k Fee article here.
This is money you put into that 401K, yet you are not given control because the government doesn’t feel you are responsible enough to save for retirement so they have restricted access, created rules that support their goal and assumed control.
To get more information on how whole life insurance policies work in your favor, read the book Farming Without the Bank to find out more. Or if you have an understanding of them and would like to put one to work for you, call our office at 701-751-3917.
Information on 401k loans obtained from: http://www.guideto401kloans.com/ and http://www.ehow.com/info_7823801_401k-another-loan-prior-repayment.html
Read More: Are you really diversifying and getting all of the tax advantages retirement? Find out in this article, Why Investment Diversification and Tax Advantage Are Not What They Seem To Be.