THE LIFE INSURANCE LOAN

One of the significant benefits of the Perpetual Wealth Strategy is the life insurance loan. We get questions about this component on a daily basis – both before and after clients begin their life policy – and it’s easy to see why.

Our clients range from wealthy business owners and investors, to those just starting out. I’ve seen investors use the life insurance policy loan to buy a business, secure a bond, or capitalize on an undervalued property at someone’s fire sale.

I’ve seen families invest in their time together by using the loan and flexible repayment terms to fund annual vacations.

The list of life insurance loan utilizations is long, and there is no one right way to leverage it as you move forward. Regardless of how you intend to employ this benefit, it guarantees you quick access to liquid capital. If you haven’t already, you’ll see that opportunities seem to present themselves more often when that’s the case.

The loan provision is also a core component of the power the Perpetual Wealth Strategy puts back in your hands as you take control of your financial life. Its successful utilization is a major part of the mindset shift we see so many of our clients undergo as they embark on a very different financial path than most. Constantly revisiting its tenets is vital as various financial opportunities and needs arise.

Here’s a brief summary of how the life policy loan works, and a few key elements to remember as you consider how and when you’ll utilize it.

• • The loan provision allows you to collateralize the cash value in your policy to take a loan from your life insurance carrier. You aren’t withdrawing cash, but are leveraging that asset to borrow money directly from the insurance company.

• • This means that even as you borrow against your cash value, the principal balance continues to earn interest. This is enormously beneficial, as it allows you to capitalize on compound interest at the same time you finance expenses or make investments. A financial asset that allows you to do multiple things at once with the same money is what we call an AND Asset. You don’t have to choose between two assets – you can use the policy AND finance another asset at the same time.

• • It’s not often people enjoy the process of applying for a typical loan. Credit checks, income verification, stacks of paperwork, and weeks of back-and-forth with the lender can be taxing and frustrating. The loan provision in your whole life insurance policy functions much differently.

• • First, it’s guaranteed. That means there is no application, no credit check, and no requirement to state the reason you’re taking it. Unlike applying for a home equity line of credit, personal loan, business loan, credit line, or credit card, the “loan process” for utilizing the cash value in your life policy is as simple as stating how much of it you wish to borrow against. Funds are typically deposited into your account within 2-5 business days after requesting them from your carrier.

• Second, loan repayment terms are entirely up to you – not the carrier, not a bank, not a corporation, not a board of directors, not outside investors. Unlike bank loans, loans you take from your policy don’t come with a predefined set of terms, minimum payments, or even monthly payment requirements. You set your own amortization schedule and determine when and on what frequency you’ll repay the balance. You even have the option of making interest-only payments for each year the life policy loan is outstanding, and even then, you can choose to defer the payment if you experience unexpected financial changes.

I want to focus on the policy loan in this inaugural issue to address three important aspects of this benefit:

1. The life policy loan helps you maximize your wealth when utilized strategically and with diligence.
2. It is NOT always the best option for financing a purchase or expense. Knowing when and when not to use it is essential.
3. How you borrow against life insurance can change with time as you age, develop additional financial assets, and adopt different priorities.

1. USE IT STRATEGICALLY, WITH DILIGENCE

Here are a few uses of borrowing from your life insurance that often provide better financial outcomes than a typical loan or consumer credit.

Student Loans vs. Policy Loans

With U.S. student loan debt topping $1.5 trillion, it’s no secret that most college students and their families can’t afford to fund their education with cash on hand. Consumer debt, inverted financial statements, the retirement savings gap, and the ever-rising cost of living all contribute to millions in new loans every year.

The typical financing structure students apply for is designed on deferred payments that don’t go into effect until the student completes or abandons her education. The interest on the loan, however, goes into effect immediately and continues accruing until it’s paid in full. Once the borrower starts making payments, they are usually only the minimum required, taking years, if not decades, to resolve the full balance.

This is problematic for a number of reasons; two of the more obvious being:

1. The dramatically higher amount the student will pay in comparison to the original loan value
2. The other places that money won’t be going as they try to tackle the debt over the coming years

When utilizing a life insurance loan instead of student loans, you have the ability to tailor how and when the loan is repaid. This is an enormous benefit that allows you to determine both the repayment plan and who will be repaying what portion of it.

If parents are funding education:

• Most don’t want or need to defer loan payments
• Most don’t want to sign away thousands of dollars from their bank account on multiple occasions over four or more years
• They can keep their family’s financial practices and priorities on track despite the ever-rising cost of tuition

The loan provision allows parents to set up a repayment plan on a schedule that works for them, and involve their child in the repayment process if and how they choose.

If a student is funding education:

• They can choose from monthly, quarterly, annual, interest-only, or deferred payments
• They can choose to alter that payment frequency at any time, decelerating or accelerating repayment

For the 2019-2020 school year, student loan interest rates are clocking in at:

• 4.53% for subsidized and unsubsidized undergraduate loans

• 5% for

Perkins loans

• 6.08% for unsubsidized graduate loans

7.08% for Direct PLUS Loans

In many cases, borrowing against life insurance instead of using student loans provides a lower interest rate for the borrower as well. Less interest and non-deferred payments can ultimately cut thousands of dollars and years of monthly payments from the debt sheet.

And unlike the repercussions for defaulting on a typical student loan, a life policy loan offers protections and options where other loans offer punishment.

Whether it’s a parent or a child repaying the policy loan, you and your family have the power to choose how that’s handled. This offers tremendous peace of mind for parents trying to help their children stay out of debt while providing them with quality education that doesn’t drain their own bank account. This utilization can provide you with the ability to continue reinforcing sound financial principles through even the most expensive life events.

Whether or not you leverage a policy loan to fund tuition, I hope the power you have with the loan provision is resonating, as it applies to both planned decisions and entirely unexpected curve balls.

Cash Down Payments vs. Life Insurance Loans

Real estate investing is a common use of loans on life insurance. Many clients choose to adopt the Perpetual Wealth Strategy because it’s an AND Asset, allowing them to establish both the policy and specific real estate investments as financial assets.

You likely understand and have been through the mortgage qualification process at some point in your life. For all the complicated documents they entail, they’re actually pretty straightforward:

• You’re approved for a loan amount based on income, credit, debt, employment, and down payment
• You make a cash down payment, usually somewhere between 5-25% of the total purchase price
• Your interest rate, typically lower than other types of loans, is locked in for the duration of the loan (typically 30 years if you don’t refinance)
• Payments are predictable with only minor fluctuations over the life of the loan as the monthly payment is adjusted for changing taxes, escrow shortages, mortgage insurance, etc.
• Payments are locked in – no deferring, no skipping, no partial payments
• You can always pay more towards the principle balance, but certainly not less and not on terms that differ from your existing mortgage contract

If you’re purchasing a second home, a vacation home, a rental property, or multi-family housing, a 20-25% down payment is typically required. Your income, credit score, tax returns, job history, debt-to-income ratio, and collateral are even more a factor than they were when you purchased your first home. You have another set payment schedule that will be enforced come hell or high water, and another entity to answer to.

Leveraging a life policy loan for real estate doesn’t usually take away the need for a mortgage on the remaining balance. What it often does eliminate, however, is utilizing cash on hand to make the down payment.

A policy loan can provide both the resources necessary to purchase the home, as well as initial capital for any repairs or upgrades that are required for inhabiting or reselling the home at maximum value.

Your intended use of additional properties is also a big factor in how quickly the loan gets repaid, and therefore, how quickly you’re able to act on the next opportunity utilizing the same funds.

For example, we have a client whose life policy is two years old. He’s purchased two investment properties using policy loans as down payments during that time, paying each off entirely before investing in the next property. His goal is simply to expand his real estate portfolio and rental income.

Another client used the policy loan to purchase a family cabin. While the down payment came out of a single policy’s cash value, each member of the family is paying an even amount back into that policy, validating the equal share of ownership they have in the property. Time and repayment structure is less of a concern for this client, as they don’t intend to buy additional properties at this time. Instead, they’ve leveraged the loan provision to purchase a legacy asset as a family.

2. WHEN LIFE POLICY LOANS AREN’T THE RIGHT FINANCING OPTION

We’re amidst the longest bull market in history and, currently, a low-interest rate environment. Both have led to an increased ability to get cheap capital for cars, homes, and other major purchases.

If you’re in the market for a major purchase with a fixed interest rate, it’s possible that a bank or private lending rate may beat the one you’d receive from a life policy loan.

This comes down to simple evaluation: what’s the total you’ll end up paying through each loan, and does using cash in your checking account introduce downsides that justify choosing a higher interest rate?

Remember that there will likely be instances in which a policy loan won’t be the right financing option. While it’s a significant component of the Perpetual Wealth Strategy, it’s important to remain diligent in its utilization, including weighing it against other financing options as new needs and opportunities arise.

3. CHANGING LIFE POLICY LOAN USES OVER TIME

We work with clients in every stage of life, and it’s incredible to see how borrowing from life insurance provides solutions in each.

The above examples demonstrate how it can eliminate reliance on consumer credit, typical loans, and cash in the bank, but you can use it for so much more.

Pay Off Debt

We’ve seen clients from their 20s to their 70s erase thousands of dollars in expensive personal and family debt by leveraging policy loans.

As of January 2019, the average interest rate on consumer credit cards exceeded 14% for existing accounts and 19% for new offers. If your credit card debt is subject to anywhere near these charges and you’re carrying a balance month-over-month, a policy loan may help you eliminate both.

When you’re debt-free, a policy loan can also help keep you that way. Rather than relying on consumer credit for unexpected needs, medical expenses, or changes in income, the loan provision can get you the capital you need without the burden of consumer financing or dwindling cash in the bank.

Invest in Yourself

Our non-retirement driven approach often introduces our clients to a myriad of options they hadn’t previously considered. We plan for financial health and control at every stage of life, often leading our clients to adopt a goal not of retirement, but of different forms of contribution.

Some clients borrow from life insurance plans to start new businesses. Others fund living expenses while writing books, serving their communities, or scaling back their normal workload. Some consult, do freelance work, travel, or focus on their own health.

All of these routes are examples of our clients choosing to invest in themselves. Whether you plan on working a full-time job for the next year or the next 30 years, at some point, your goals and priorities will shift. Life policy loans can provide a solid foundation for change, regardless of what that looks like for you.

Provide Family with Capital

Many of our clients involve their spouses and children in the Perpetual Wealth Strategy. We are emphatic about family adoption and have seen clients improve not only their entire family’s finances as a result, but also their communication patterns and relationships.

Providing your family with access to resources is an enormous benefit of life insurance loans when accompanied with sound financial education.

Through the policy loan provision, you have the ability to help your children establish their own financial foundation. We advocate teaching your children how to evaluate investments. Letting them explore the options they have and discern those they wish to pursue based not only on viability, but also their own personal passions.

These are practices that help create and protect generational wealth.

As you can see, the way you borrow from your life insurance now may not stay the same over time. Understanding how it can help you accomplish different goals at different stages of life is a vital part of your ongoing financial journey. Revisit it often and consult your Wealth Strategist as your plans and needs start to change, or as major life events occur. This strategy is designed for the long-haul, not just the here-and-now.

Conclusion

There’s one question we hear most often after discussing the loan provision with clients.

“What’s the downside?”

Fair question, because there certainly is one:

Human error.

I can’t stress enough the freedom and flexibility the loan provision affords you in every stage of life. Rather than binding you to the rules and governance of self-serving institutions, your policy shifts the control back to you, the policy owner, allowing you to do exactly what you need and want with your assets.

That control comes with great responsibility. The only reason we ever see life policy loans provide a disservice is when they are abused. Just like taking funds from a savings or checking account, the only way to replenish the full cash value of your policy is to repay the loan.

Remaining diligent and responsible is crucial to ensuring it works as intended, replacing uncertainty and debt with control and freedom.

We’ve developed a Life Policy Loan Amortization Schedule and Loan Summary worksheet to help you determine how you’ll repay your policy loans. Keep this handy as you explore investment opportunities or as new financial needs arise.

And, as always, continue talking with your Wealth Strategist. They are here to help you get the most from your policy and strategy, and can advise you on when a life insurance loan may or may not be the right financing option. They can also help develop an amortization schedule for specific opportunities. They are your advocate and guide, and I hope you’ll continue leveraging that relationship as you move forward.