Inject More Cash
This solution works well for a policy owner if the policy owner is keeping a large sum of money in a savings account or bond portfolio earning little, while the cash value insurance could earn 6% a year.
By injecting more cash into the policy, for example, if the entire loan balance is paid off, obvious the problem is solved. But as long as the policy loan balance is reduced, it will help mitigate the problem because the rate of loan compounding will slow. If not enough to pay off any loan balance, by just paying the annual interest could mean the loan balance is not compounding further.
Most of the times, it's the failure to pay insurance premium that triggers the problematic loan situation in the first place, either because it's a whole life policy that forces premiums to be paid via the automatic premium loan provision, or because it's a universal life policy that has insufficient cash value to keep up with all of the costs while the loan accrues.
In our next blog post, we will discussion another solution - 1035 exchange.