“I bought a new life insurance policy but the small print is impossible to understand. All I´m sure of is that after I die, I can stop paying.”
Do You Want to Stop Paying Your Life Insurance Premiums?
What happens if you own a whole life policy and you don’t want to keep paying the premiums, but don’t want the policy to lapse? Or when you can’t afford the premiums any longer, but still want coverage?
If payments are stopped without altering the policy or communicating with the insurance company, you could lose the policy, just like a homeowner can go into foreclosure if they stop making mortgage payments.
But there are other options to simply letting a policy lapse! These options are well-worth considering, especially because:
“When we leverage, we aggregate and organize existing resources to achieve success.” – Richie Norton, The Power of Starting Something Stupid.
When you invest or store your dollars somewhere, it’s important to consider if—or on what terms—you can borrow them back should an urgent need for cash arise. The ability to use your assets as collateral can increase your security—and your WEALTH!
While you may not plan on wanting or needing your dollars back, it’s common for people to find themselves in financial situations they didn’t anticipate. And when that happens, if you can borrow against assets, you can solve the problem with minimal financial disruption.
The ability to use an asset as collateral is also a test of its strength.
Dollars in the form of saving accounts, certificates of deposit, and other negotiable instruments can be easily collateralized in most cases. Unfortunately, savings accounts and CDs offer an extremely low rate of return as well as little flexibility or other benefits.
“Believe (me), it’s not fun trying to explain to a client why his cash value went down and what are those high fees about.”
– Agent/Advisor discussing Whole Life vs. Indexed Universal Life with a colleague
Have you ever wondered if a financial professional was selling you what is really best for you? Perhaps we all have at one time or another. In this post, we peel back the advice that agents and advisors give, not just to their clients, but to their colleagues about permanent life insurance, namely, whole life vs. universal life.
Whole life insurance has been around since before the depression, and has helped policy owners through good times and bad like an old reliable workhorse. In more recent decades, however, some consumers have demanded policies that might resemble a show horse more than a trusty mare. The result has been Universal Life, which has promised – if not always delivered – greater flexibility and faster growth of cash value. (See last week’s post for more about the differences between Universal Life and Whole Life.)
“Last week I bought a life insurance retirement policy. All I’ve got to do is keep up the payments for 15 years, then my agent can retire.”
How much commission does a life insurance agents make? You might be very surprised…
In the last two weeks, we have exposed the shocking affect that those “little” mutual fund commissions can have over time. First, we showed how the average American family loses six figures (an average of nearly $155k) of their retirement to fees and commissions. Last week, we demonstrated how qualified plan participants who leave their dollars in target-date retirement funds (or other mutual funds) can lose up to 79% of their hard-earned dollars to the tyranny of compounding fees.
But what about the commissions you’ll pay on whole life insurance? Aren’t they even worse!?
Financial authors and educators name “huge commissions” as proof positive that whole life insurance is a terrible financial strategy. Insurance agents are rumored to take home 80%, 90%, or more of the first year’s premium, which is difficult for many people to stomach. But is this the whole truth?
Recently, Tom Dyson at the Palm Beach Letter and Palm Beach Wealth Builders Club investigated this and published a ground-breaking report called “The Shocking Truth about Life Insurance Commissions,” exclusively for their paid subscribers. (Palm Beach Letter publishes exclusive newsletters about lesser known investments and money-making opportunities used by the wealthy. They do not sell insurance or receive insurance commissions.)
The special report showed the real facts and figures – how life insurance commissions work, and how these insurance cash value accounts (and the commissions) compare in the long run with mutual funds. We were so blown away by what they discovered that we begged their permission to share liberal portions of this “for paid subscribers only” report with our own readers. (Fortunately they said “yes”!)
“A bank is a place that will lend you money if you can prove that you don’t need it.”
Two weeks ago we asked the question, “Should you borrow against your life insurance policy?” Today, we continue the topic by looking at the advantages and disadvantages of borrowing against a life insurance policy. The Advantages of Borrowing Against Life Insurance
It’s simple and relatively quick. There’s NO QUALIFICATION process, no need to fill out an application, have your income or credit checked, nor brace yourself for high fees and taxes (in most situations, see below exceptions.) You’ll have your loan in 5-10 business days for most companies, and occasionally they have faster options.
It’s flexible. You can borrow about 95% of the cash value amount of your whole life policy from most mutual insurance companies. And when you borrow against your insurance policy, you can design your own repayment schedule, modify it as needed, or even continue down the path of life without repaying it if your circumstances require. In contrast, most types of non-insurance loans have strict repayment schedules that may or may not work well for you.
It’s cheaper than you think. Life insurance policy loans are running in the 4 – 8% range right now. But that does not equate to a bank loan for the same amount. This is because you’re borrowing against an account that likely has an internal rate of return of 4-5%, depending on your age. And since you are borrowing against your cash value, not borrowing the cash value itself, your cash value continues to grow and earn dividends, which offsets the interest on the policy loan.
It’s (probably) not a taxable event. Although there are exceptions, typically the IRS will never know that you borrowed the money. Like taking a second mortgage or line of credit against a rental property, a policy loan is not considered “income” in most situations.
“Most people do not become rich because they fear the power of leverage.”
One of the advantages of a Whole Life Insurance policy is the ability to borrow against your cash value, though the concept is widely misunderstood, even by insurance agents! In this post, we’ll explore exactly what it means to take a loan against your insurance policy, and we’ll look at some good reasons – and bad reasons – to borrow against your policy.
Do You Borrow Your Cash Value, or Borrow Against It?
A common misunderstanding is that people think they are actually borrowing the cash value itself, but actually, they are taking a loan against it. Your cash value is the collateral that the life insurance company lends against. So the real choice you have is to either reduce (or liquidate) your cash value, or borrow against it.
The cash value is your savings to take as you wish, but we recommend that you borrow against it rather than deplete it. Why? Just like with a house or other piece of real estate, it is usually more advantageous to keep the asset long-term and borrow against it (for example, with a mortgage) than lose the asset.
Just as with a rental home, properly structured whole life insurance policies allow you to retain the asset for future use. Real estate investors may borrow against and pay off mortgages several times against a long-term rental, and you have the ability to do the same with your cash value policy.
Just like real estate, cash value policies allow you to have a C.L.U.E., which stands for
Control – you control the asset, not your employer or the government.
Liquidity – it can be liquidated if desired, with no penalties and minimal taxes.
Use – different from a retirement account, the money can be used as you please, including used as collateral.
Equity – the asset grows over time and your net worth increases.
Good Reasons to Borrow Against Your Life Insurance Policy
Perhaps the most common reason people borrow money is in reaction to a cash flow crunch, perhaps caused by illness, divorce, or a temporary period of unemployment, But there are many good, strategic reasons why you might want to borrow against your whole life policy, even if you are not having a financial emergency.
This website is provided for informational purposes only. The information contained herein should not be construed as the provision of personalized investment advice. Information contained herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security or investment. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future.
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