Loans Against Cash Value

[DHK]

Are you working with an agent?

What state are you in?

I'm not soliciting, but it might be helpful to point you in the direction of an agent that can help you from "soup to nuts", if you know what I mean.

Also, I hesitated mentioning this, because I thought you were wanting to take a loan out of an EXISTING policy... but the way that life insurance loans work... is that as long as you pay the annual interest back to the policy, it restores the interest and dividends it would've earned had you not taken a loan out. In essence, your POLICY keeps the interest. This is assuming that the loan taken out is "non-direct recognition" meaning that the insurance company doesn't subtract the loan balance from the cash value balance to determine how much dividend or interest to credit to the policy.

How does that work? The interest is charged up front (in arrears) and then you pay it back to the policy every year to restore the amount.

This attachment from the Tools and Techniques of Life Insurance Planning on how life insurance loans works may be helpful.

 

[YourFamilyBank]

Oh... I don't have an existing policy yet. I'm asking my question because I'm buying a new policy now that will be generating substantial amounts of cash value (roughly $700k) from day #1 and I wanted to be able to borrow against that.

Yes, agree with DHK here. I work on all our 1000+ agents/advisors high cash value cases and I'd make sure you were on a non-direct contract or one very close to 100% non-direct and if you structure your loan correctly you'd pay less than 1% at worst case and most likely would be a straight wash.

Also make sure they run the MEC test out far enough and not just during the funding period.

Is there another reason you are going to a bank vs the Insurer who issues the contract?

 

[Dan68701]

The interest rate on the loan from the insurer is higher than what can be gotten on the open market.

What do you mean by structuring the loan correctly so that I pay less than 1%?

 

[Newby]

I'm having AML flashbacks!

 

[scagnt83]

The concept of using a life insurance policy as your own bank (I think that is what you are trying to do) or as collateral for a loan is a valid concept but only after you have contributed money into the policy over a number of years in moderate amounts to make sure it is not a MEC in order to build the up cash values that you can borrow against on a tax free basis.

Ive had clients take Loans as early as year 3. If the policy is designed and funded correctly its not an issue. There are policies out there that have well over $100k per year going into them.

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The interest rate on the loan from the insurer is higher than what can be gotten on the open market.

What do you mean by structuring the loan correctly so that I pay less than 1%?

For a WL policy yes it is. For an IUL policy it is a totally different story.


You are not able to structure a WL contract and guarantee a Net Loan cost of less than 1%. But with an IUL you can guarantee a Net 0%. You can also create the possibility of a positive arbitrage with the money you have already Loaned out.

 

[YourFamilyBank]

The interest rate on the loan from the insurer is higher than what can be gotten on the open market.

What do you mean by structuring the loan correctly so that I pay less than 1%?

It's not the stated loan rate you need to worry about - you should only calculate your net cost of money loaned.

If you structure with a non-direct recognition insurer contract, your loan rate let's say is 4.5% and you loan out $500k. Your $500,000 would "cost" you 4% and and the same $500k would earn you the guaranteed 4% plus dividends. So, the worst it would cost you is .5%, but almost guaranteed to earn more than the "cost" due to dividend. That's what I meant.

 

[Golfnut2112]

It's not the stated loan rate you need to worry about - you should only calculate your net cost of money loaned.

If you structure with a non-direct recognition insurer contract, your loan rate let's say is 4.5% and you loan out $500k. Your $500,000 would "cost" you 4% and and the same $500k wou
ld earn you the guaranteed 4% plus dividends. So, the worst it would cost you is .5%, but almost guaranteed to earn more than the "cost" due to dividend. That's what I meant.

What company guarantee's 4% plus dividends?

 

[YourFamilyBank]

What company guarantee's 4% plus dividends?

Most of the big mutual whole life companies have that... Not uncommon.

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Ive had clients take Loans as early as year 3. If the policy is designed and funded correctly its not an issue. There are policies out there that have well over $100k per year going into them.

You can set them up to efficiently take loans in year 1 - even month 1. And yes, we do a six figure annual premium case monthly on average. Our business case designs average around $60k per year.

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For a WL policy yes it is. For an IUL policy it is a totally different story.


You are not able to structure a WL contract and guarantee a Net Loan cost of less than 1%. You can also create the possibility of a positive arbitrage with the money you have already Loaned out.

Uhh... yes you can. And you can create positive arbitrage as well. Not as much as potentially with an IUL but you can.

 

[DWPCL]

Most of the big mutual whole life companies have that... Not uncommon.

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You can set them up to efficiently take loans in year 1 - even month 1. And yes, we do a six figure annual premium case monthly on average. Our business case designs average around $60k per year.

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Uhh... yes you can. And you can create positive arbitrage as well. Not as much as potentially with an IUL but you can.

Your statement is a bit misleading. The 4% is guaranteed so that the cash value endows. Its not the IRR earned by the policy holder.

 

[scagnt83]

Uhh... yes you can. And you can create positive arbitrage as well. Not as much as potentially with an IUL but you can.

So how about sharing which WL GUARANTEES a NET Loan of less than 1%?....