If your answer to these questions is, “I don’t know,” you may need some help.
Rather than using a bank or other financial institution to borrow from, consider using an established life insurance policy. If you had fully funded an IUL or whole life policy ten to twelve years ago and the cash value has performed, you would have sufficient cash value to make loans from the policy to themselves for cars, appliances, or a down payment on a home. Instead of paying non-deductible interest to a bank, you can be paying yourself interest on the loan which then increases cash value in the policy which can then be borrowed out again in the future for another purchase or supplemental retirement income.
Bankers contend that the interest is being paid to the insurance company so there is no benefit. They leave out the fact that although individuals are paying interest to the insurance company all their money, including the loan amount, is still earning interest based upon how the money in the whole life or IUL policy is invested. When you borrow money against a life insurance policy, you are borrowing from the general fund of the life insurance company while using cash value to secure the loan. If the policy earns more in interest than the insurance company is charging, then you come out ahead.
What kind of people does this apply to?
- Individuals who want a portion of their portfolio allocated to modest but guaranteed growth
- Those who believe income tax rates may increase in the future
- People who want to save money for emergencies
- Individuals who want to save for specific events such as education funding or weddings etc.
- People from high probate states that want assets to bypass probate
- Individuals who like the features of a Roth IRA but who cannot qualify to contribute to a Roth IRA
- Individuals who seek asset protection
Benefits of Using a life insurance policy:
- Principal protection
- Competitive growth rate
- Access to equity prior to age 59 ½
- A tax-free death benefit over and above the loan and accrued interest amount
- Tax sheltered growth
- Creditor protection in many states
- Ability to access Accelerated Benefit Riders in the event of a covered illness or accident
Another reason that this works for the insured is because it is a cheap source of liquidity and is available without completing loan documents or a credit application. If the loan is not all paid back, the insurance company pays itself back out of the death benefit. It does work better if the loan is paid back so the insured can take advantage of cheap financing again and again.