“Many consumers forget a life insurance policy is another tool they can use as an asset to borrow money.”
– Larry Ziegenfuss, Senior Vice President, Conestoga Bank
Borrowing “from” vs. borrowing “against”
There’s a trick to borrowing money at favorable interest rates. The trick is having rock-solid COLLATERAL that is just as good as (or better than) “money in the bank.”
There’s also a trick to borrowing money without having to demonstrate income, prove your credit-worthiness, show your ability to pay it back, and defend your reason for borrowing it.
One of the significant advantages of a participating (dividend-paying) whole life insurance policy is exactly this: the policy builds cash value that you can borrow against at any time, for any reason, without a credit check or even an application process.
Some people think, “Of course you don’t have to jump through hoops… it’s YOUR money!”
And they might wonder why someone would pay interest to borrow “their” money.
But this is incorrect.
When you borrow against an asset, you’re using it as collateral.
Pawn shops do this when people bring in Grandmother’s diamond jewelry. (And an interest rate of 5% might seem reasonable, until you learn it’s 5% PER MONTH!)
Financing institutions make car loans with the car as collateral… IF you have reasonable credit, and a decent payment history, and proof of a steady income.
Banks and mortgage lenders make loans using homes as collateral… IF you have good credit, a down payment, and proof of a sufficient, stable income.
Likewise, life insurance companies also lend money, using policies with cash value as collateral. They lend AGAINST the cash value. Meanwhile, just like you get to drive your car or live in your house even with a loan against it, you get to use the money you are loaned while the money used as collateral keeps doing ITS job… of growing and earning more money!
There are many upsides to this scenario.
You can borrow from the insurance company and access money
- without waiting until you’re 59-1/2
- without proving it is for an “allowable” reason
- without having to “qualify”
- without having someone else determine your re-payment schedule
- without paying penalties and taxes (you will pay interest), and
- without wondering if the loan will be approved.
The potential downside to borrowing from insurance companies for those with excellent credit, is that an 8% interest rate might not seem very competitive. (8% is approximately the amount the rate typically charged at the time of this writing for fixed rate life insurance loans.)
But there is often another option…
Often, a local BANK or even a credit union can provide a lending solution at a lower rate… using your life insurance policy as collateral, much as you would if you borrowed straight from the life insurance company.
It could not only be a good deal for you, it’s a good deal for the bank, too. A well-collateralized loan is a safe bet, and the bank can earn perhaps 4% annually on an extremely conservative loan with virtually no risk.
The Net Effect
Now, it’s always good to get a low interest rate when you’re on the borrowing end, but here is where things can get VERY INTERESTING.
If you can obtain a bank loan at an excellent rate, say, 4%, and if your life insurance cash value is earning at a net rate of 4 or 5% (actual rate varies according to company, age and health), then your collateralized cash value can actually earn as much or more than the interest rate you’re paying the bank.
In such situations, the COST of borrowing against your cash value is literally cancelled out by the GAINS of the policy. (Sometimes, you even come out ahead!)
Seen another way, the policy is actually generating cash to make the loan payments with!
THIS is why we rarely recommend withdrawing cash value when you need money… borrow against it instead, and it will continue to work for you!
This is why it is so powerful to be able to provide your OWN financing as you go through life. We have enormous needs for FUNDING throughout our lives, from our first car to credit cards to our last home mortgage, and the more we can eliminate bankers from our personal economy while still keeping cash MOVING and CIRCULATING – and under our own control – the more prosperous we’ll be.
This strategy is known in some circles as “Infinite Banking,” a term coined by Nelson Nash, or “Bank on Yourself,” as described by Pamela Yellen. It is also one of many strategies described in my Live Your Life Insurance book.
Common Questions about Borrowing Against Life Insurance from a Bank
What banks will lend against cash value?
Banking institutions we’ve seen lending against whole life policies include those on this list. (We cannot guarantee accuracy, this list includes sources recommended to us and we don’t have personal experience with most of them, just reliable recommendations at the time the recommendation was made.)
We also recommend that you check with your local bank or credit union, as many banks will loan against a cash value account. The going rate at this writing is around prime (3.5 – 4%), with SBA loans running a little higher.
Does the lender become the beneficiary?
No. Through collateral assignment, the lender is guaranteed only the outstanding amount of the loan should you die or default. In the unlikely event of death, the beneficiaries would receive the remaining death benefit after the loan balance had been paid.
Do I have to be the insured?
Not necessarily. When cash value is securing the loan, it does not matter who the insured is, only that the person using the policy for collateral is the policyholder.
How long does it take?
It can take 10 days or even a little longer for the paperwork to be processed and for you to receive you loan, but it can vary bank to bank.
What kinds of policies are best for using as collateral?
Although lenders may accept several types of life insurance as collateral, we prefer participating whole life insurance policies, Why? Although borrowing can work with just about any life insurance policy that builds cash value, some policies do not guarantee a minimum amount of cash value… or can even LOSE cash value!
Indexed policies that mimic to some extent the gains of the stock market guarantee a minimum interest rate (sometimes as low as zero). But contrary to popular belief, indexed policies such as Indexed Universal Life (IUL) can and do lose money if and when the policy costs (such as fees and the cost of insurance) outweigh the gains.
Worse yet, we’ve seen Universal Life policies in which costs have drained all cash value and actually become worthless (although not all UL policies are in danger of imploding, as we call it.)
What else can be used as collateral?
It all depends on the bank, the type of loan, and what qualifications are required. Any asset that your lender accepts as collateral (and which is allowed by law) can serve as collateral.
In general, lenders prefer assets that are easy to value and turn into cash. Some common forms of collateral include:
- Real estate (including home equity)
- Cash accounts
- Machinery and equipment
- Some types of investments
- Insurance policies
- Future payments from customers
Retirement accounts such as IRAs are often not allowed to serve as collateral, as we discuss in “The Leverage Test.”
Some banks even offer insurance-secured loan OR lines of credit. These lines of credit can be very advantageous to business owners, as we’ll discuss further in a future blog post describing the many surprising business applications of life insurance.
If your local bank does not lend against life insurance cash value, try these resources.
Are You Curious to See How Much Cash Value a Policy Might Provide?
Contact Partners for Prosperity and request a no-obligation illustration today. We have specialized in high-cash value, dividend paying whole life insurance (along with alternative investments) for 25 years (even before Partners for Prosperity!)