Because the life insurance company controls the cash value that is serving as collateral to the loan in the first place! Click To Tweet. Thus, as the value of the loan approaches the cash value of the life insurance policy, the insurance company does in fact compel the liquidation of the collateral to repay the loan… even if that unfortunately causes the life insurance policy to lapse in the process!
An important caveat to the dynamics of life insurance policy loans — and the fact that if the value of the loan reaches the total cash value of a policy it can cause the life insurance to lapse — is that even if no payments are being made on the loan and its balance compounds or technically, negatively amortizes , the cash value as the underlying collateral of the loan continues to grow as well.
After all, the life insurance policy loan is still nothing more than a personal loan from the insurance company, using the asset value of the life insurance as collateral. But in the context of life insurance — where the value of the asset can grow almost in line with the balance of the loan, even when no payments are made on a life insurance policy loan — it can take a significant amount of time for the compounding loan balance to erode the net equity of the policy and ever trigger a lapse of the coverage.
Or viewed another way, determining how long it will be until a life insurance loan causes the policy to lapse is based on the net borrowing cost how quickly the loan is outcompounding the cash value asset , not just the stated borrowing rate on the loan.
And in reality, it would take even longer, because subsequent premium payments into the life insurance would add even more cash value, increasing the size of the collateral and reducing the danger of policy lapse. Some even have the potential that the underlying cash value may outearn the borrowing cost anyway between the growth in cash value and potential dividends from a non-direct recognition whole life policies , or the upside potential from the crediting methods of equity-indexed universal life policies.
The difference is simply that the loan happens to come from a life insurance company, and can be done at a relatively appealing rate of interest thanks to the cash value of the life insurance serving as collateral for the loan. Still, the borrower is really doing nothing more than taking out a personal loan and racking up loan interest while using their cash value life insurance as loan collateral!
Also, contrary to popular belief, Indexed Universal Life IUL can also function quite well as your own private bank if it is designed and monitored correctly. You can read all about the pros and cons of IUL here.
What I find so interesting is that if your local bank offered an account with these benefits, then people would be lining up around the corner to deposit money into.
But since the whole life insurance industry has done such a terrible job of positively promoting its own wares, this concept remains one of the best-kept financial secrets in America.
Some of these financial gurus even have a hidden agenda to sell rivaling products when you pull back the sheets. Regardless, these blowhards will rarely ground their overstated opinion with detailed facts like you will find throughout our site.
There is an infinite number of ways to design a policy for different financial goals. Here are the two opposite ends of the spectrum:. The agent helping you set up the policy should use a combination of policy design features and optional riders to allow for robust cash growth to occur early and often. Designing a whole life insurance policy in this manner will substantially reduce agent commissions and allow for more rapid cash value growth inside the policy to be used for your own private family bank.
And that tees us up to discuss Myth 2…. And furthermore, we have to assume then that you are disciplined enough to save up cash afterward for your next purchase. If so, you will in most circumstances be much better off funneling those funds through a properly designed life insurance policy and utilizing the flexible loan feature as described above.
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The Numbers and Facts: 9. Answer this question, if NDR pays the same dividend no matter what, how is the insurance company paying more dividends back to the policy holder who takes a loan? Taking the loan does not make you better off.
Saving more money is making you better off. The use of a life insurance policy reduces economic loss that would be incurred from simply taking out a loan.
But stop with the overly rosy depiction. Thanks for your response. Prove that my statement about the additional returns are false. Use real numbers and lets see your illustrations. You wrote the review, now back it up. And your comment about being able to do this with a bank account simply by paying yourself the additional interest is interesting.
Is that what people do? Do you do that? Do you know anyone who does that? What are you trying to prove? That you know more about this than anyone else? If so, write a book. Making claims that could be conceptually correct, but have never been proven by any hard evidence.
Great discussion taking place. As a third party looking in I think BOTH of you should use examples and numbers to back up your arguments. Lately this blog has been a bit stale, this post was a much needed refreshment. As for your question regarding loan provisions in relation to NDR and DR companies, the two things are unrelated. We have no problem sharing openly with our readers and will take your suggestion in to consideration. Thanks for supporting us!
Glad you feel that we offer something new for to learn on a regular basis as I can assure you that we put a great deal of time and energy into everything we publish.
As for examples and numbers, we may consider doing a side-by-side comparison, thanks for the suggestion.
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