Today we’re discussing mutual life insurance company policy loans. We’re going to look at the cash value inside of a mutual life insurance company’s whole life insurance policy. We’ll discuss how it works, and how it’s available in times of an emergency or when an opportunity comes your way. This stash of cash below is going to represent the life insurance company.
On a regular basis, you are putting money into your whole life insurance policy, allowing it to grow in addition to having the death benefit increase as dividends are issued by the company. The money continues to grow. Your policy continues to grow. If done correctly, you will also not be receiving a 1099 form at the end of the year. So, it’s tax-deferred and does not need to be reported to the IRS.
When it comes time that you need the money, this is where many financial advisors get it wrong. Some people say that you are borrowing your own money. That is not how this works. What happens is that you have collateral that you have built up inside your policy, and it is getting a competitive rate of return. When it comes time that there's an opportunity that comes your way and you need cash, you can go to a bank, but then you might pay a fee. You might also have to have an appraisal of your house. You might have to have a background check. You might need to have a credit check.
Instead of doing all of that with your bank, you have this agreement available with your whole life insurance company to have access to your money. This is how it works and you are not borrowing your own money out of the policy. Instead of ‘from’ you are using your policy as collateral to borrow ‘against’ it. Your money remains inside the policy. The life insurance company gives you their money from their general funds. There is a cost to this. There is a competitive interest rate that you will pay for the accessibility to this money that is coming from the general fund of the life insurance company.
Here’s where it’s different than a bank: you didn’t have to pay any additional fees, you didn’t have to get pre-qualified, and you didn’t have to commit to a monthly payment plan. A competitive interest rate is going to be charged, but you will determine over what period of time that the loan will be repaid. Maybe it will be repaid in a month, a year, 10 years, or more. You have the freedom to be able to make your decision on when the loan that you have taken out goes back to the life insurance company. All the while, your money remains untouched and continues to grow just as it has for the years that you’ve owned your whole life insurance policy through a mutually owned life insurance company.
If this is something that you are interested in, reach out to us. We will put together your own, personalized numbers to show you how this can work in your own, unique situation.
NOTE: If death occurs while a loan is held against your whole life insurance policy, the life insurance company loan is eliminated first, with the balance of the death proceeds being processed on behalf of the beneficiaries. If you were to never pay the policy loan back during your lifetime, the insurance company will continue to let you know of the interest you should pay each year to keep your policy in its current status. Each situation is unique. For additional information on how policies work with your unique requirements, please reach out to us.
