Borrowing from life insurance policies can sound like an attractive idea. But before you can, there are many things to consider, from policy options to limitations with borrowing. This article answers common questions about infinite banking and outlines everything you need to know about borrowing from life insurance policies.
What is life insurance?
Life insurance is a contract between the policyholder and an insurer. The policyholder pays a premium to the insurer to secure a sum of money (called a “benefit”) from the insurer when the policyholder dies. The benefit is intended to ensure financial security for the policyholder’s dependents after their death.
What are the different types of life insurance?
There are many types of life insurance. However, two of the most common ones are term life insurance and permanent life insurance. Permanent life insurance also has subtypes.
- Term life insurance lasts for a pre-set period, and policyholders are limited to waiting for death to have access to their money. However, term life insurance policies are often cheaper. Standard term-life insurance lengths are 5, 10, 15, 20, 25, and 30 years.
- Permanent life insurance is a term used for policies that last a lifetime. These policies are more expensive but offer more flexibility and control to policyholders. Common types of permanent life insurance include variable, universal, and whole life insurance.
What is infinite banking?
Whole life insurance, particularly dividend-paying whole life insurance, has a fixed benefit (cash value) that grows tax-free for the duration of the policy and creates a fund that can be borrowed against. Borrowing money from a whole life policy can accrue interest, but the policyholder captures the interest. This is the process that occurs within banks and other financial institutions.
Can I borrow from a term life insurance policy?
Borrowing from term life insurance policies is typically impossible because these policies do not build cash value. Insurance companies use cash value as collateral when a loan is taken from the policy. Without cash value, it is not possible to take out a loan.
What policies can be borrowed against?
Any permanent life insurance policy can be borrowed from. However, certain types are better suited for infinite banking.
With variable life insurance, the cash value is invested into sub-accounts (e.g., equities, bonds, or indexes). Therefore, cash value depends on the sub-accounts performance and cannot be maximized.
With universal life insurance, cash value increases by investing funds into indexes (or keeping it within the policy to earn a low, fixed rate of return). Therefore, like variable life insurance, cash value also depends on performance.
Cash value in a whole life insurance policy is not dependent on the performance of accounts, making it ideal for infinite banking.
How to grow cash value in a whole life insurance policy?
With whole life insurance policies, the policyholders pay monthly premiums. The premiums pay for the death benefit and miscellaneous fees (e.g., administration fees). Any remainder from the premium payment is considered cash value. Cash value is guaranteed in the initial policy but can be improved through participating whole life insurance or by paying more than the premium payment.
Participating whole life insurance allows for additional growth through dividends. A dividend is a sum of money granted to shareholders from a company’s profit or surplus. Purchasing dividends can grow cash value but may be riskier and involve higher premium rates.
Policyholders can also add value through paid-up additions riders. A paid-up additions rider is additional coverage bought using the money received from dividends.
How to borrow from whole life insurance?
Once enough cash value has accumulated in the policy, it can be borrowed against. Borrowing processes may differ from company to company, but the process is generally straightforward.
The policyholders contact their insurance company and let them know how much they want to borrow and where to send it. And the insurance company sends the money by check or transfer, typically within a few days.
When a loan is taken from a policy, the insurance company will charge the policyholder interest, which is added to the loan balance. And the policyholder can make payments when they like.
The policyholder captures the interest, and there is freedom when paying it back. However, there are some essential things to keep in mind:
- Interest will continue to accumulate until the loan is paid, so taking too much out without paying some back puts the policyholder at risk of exceeding the cash value. If this happens, the policy will lapse.
- Outstanding loan balance will be deducted from the death benefit when the policyholder passes away, which may reduce the amount of money given to the beneficiaries.
- Only some insurance policies allow the policy to grow at the same rate as if there was no policy loan, so that borrowing may affect the cash value growth.
How much money can be borrowed from whole life insurance policies?
A loan that exceeds the cash value within the policy cannot be taken out. Typically, policyholders can take out a loan of up to 90 percent cash value, but this depends on what is allowed by the insurance company.
When can money be borrowed from a whole life insurance policy?
Money can be borrowed from a policy if there is cash value, but it will likely take several years until there is enough cash value to make borrowing feasible. However, this time can be shortened by growing cash value through dividends or paid-up additions riders.
Pros and cons of borrowing from whole life insurance policies
Whole life insurance policies can be an excellent tool for financial freedom. There is a guaranteed rate of return, the cash value grows tax-free, and there are opportunities for additional growth. Policyholders have complete control over the insurance policies and flexibility to cater to personal needs. However, there are some pitfalls to borrowing from one’s insurance policy. These include:
- Large upfront and premium costs.
- Long wait time to accumulate enough cash value to borrow from.
- Withdrawing money from the policy while the policyholder is alive may reduce the death benefit.
- Not paying on time can cause a policy to lapse.
- Understanding the ins and outs of borrowing from a life insurance policy can be challenging for people not in the financial field.
Those willing to put in the effort that have the financial means to do so will likely benefit from investing in whole life insurance policies. And there are many resources and professional guidance available to help get you started.
Get Started with Infinite Banking
If you have a question about infinite banking or borrowing from a life insurance policy, contact us at Living Wealth for a free personal consultation.
You can also take our free introductory infinite banking course: Start here.
If you are new to infinite banking, you have likely heard that it allows you to become your own banker by using and borrowing money from your policies. But some may wonder how this works. And what kind of policy is needed to do this. This article will answer these questions and further explain the ins and outs of borrowing money from life insurance policies.
What type of life insurance policy should you use?
One of the most common types of life insurance people buy is term life insurance. This policy lasts for a pre-set period. Because of this, it is often cheaper, but policyholders are limited to waiting for death to have access to their money. Therefore, term life insurance does not have cash value, so policyholders cannot borrow money from it. However, this is possible to do with permanent life insurance.
Permanent life insurance is a blanket term used for policies that last for the duration of the holder’s life, making them more expensive upfront. However, with the more considerable cost comes features that allow policyholders to have more control over their money.
Common types include variable, universal, and whole life insurance. However, certain ones are better suited for borrowing.
Cash value can only be invested into sub-accounts (e.g., equities, bonds, or indexes) available to the policy with variable life insurance. Holders can borrow from this type of policy, but cash value depends on the sub-accounts performance. Therefore, the cash value may not be maximized.
It is possible to borrow from universal life insurance as well. Like variable life insurance, cash value increases by investing funds into indexes (or keeping it within the policy to earn a low, fixed rate of return). Therefore, the value is also dependent on the performance of the indexes.
Whole life insurance, particularly dividend-paying whole life insurance, offers ideal circumstances for borrowing against the policy. Unlike the previous types, growth is not dependent on the performance of accounts. Instead, there is a fixed benefit that continues to grow for the duration of the policy. Cash value also grows tax-free, and you can borrow against what you have paid into it. The growth of the policy is also not dependent on the IRS or the federal government.
How to borrow money from a whole life insurance policy
Purchasing a whole life insurance policy typically involves a larger initial fee and higher premiums. These fees allow for more financial control and security; however, it is common to wait several years until there is enough cash value in the policy for what you need.
How these policies work is that policyholders pay monthly premiums, and the amount paid is more than what is needed for the death benefit and goes to other fees such as administration fees. The rest of the premium payment remains as cash value. Additional cash value can be added by paying more than the premium payment or through participating whole life insurance.
There are two common types of whole-life insurance – non-participating and participating. As the name suggests, non-participating insurance policies do not participate in investment activities. Policyholders still have a guaranteed rate of return and cash value-added, but the growth will not exceed what is provided from the premium payment.
Growth through dividends
Participating whole life insurance allows for additional growth through dividends. When a corporation earns a profit or surplus, a portion of this is shared with members or shareholders as a dividend. Purchasing dividends allows the cash value to grow more substantially, but it is a higher risk, not guaranteed, and may involve higher premium rates.
Policyholders can also add benefits through paid-up addition riders. The money received from dividends can be used to buy additional coverage, which will provide more potential for growth.
Essentially, the first step towards borrowing from a whole life insurance policy is to purchase it and accumulate cash value. Cash value is guaranteed in the initial policy but can be improved through dividends and paid-up addition riders.
Once enough cash value has accumulated in the policy, it can be borrowed against as the policyholder sees fit. However, a loan cannot be taken out that exceeds the cash value within the policy. Nonetheless, policyholders can take out what they need, at any time, and pay it back whenever they would like to. Still, there are some stipulations when doing so.
When a loan is taken from a policy, it is expected to be paid back with interest. However, interest rates are often lower than that on a bank loan or credit card. Additionally, the policyholder is the one capturing the interest. Moreover, there is no additional monthly payment.
Although there is freedom when borrowing and paying back, policyholders are expected to do so reasonably quickly. Interest will continue to accumulate until the loan is paid, so taking too much out without paying some back puts the policyholder at risk of exceeding the cash value. If this happens, the policy will lapse. Nonetheless, many insurance companies offer options and opportunities to prevent this from happening.
Overall, a whole life insurance policy can be a great tool to provide more control over one’s money. However, there are some pitfalls. First, policyholders must invest a large sum to purchase the policy and keep up with the premium cost to get these benefits. It is also likely to take years before borrowing is possible. Additionally, taking out money from the policy when alive can reduce the death benefit down the line (if it is not paid back).
Moreover, not paying it in a timely manner can cause the policy to lapse if not careful. Finally, borrowing from a life insurance policy may be complex for people not in the financial field. Policyholders must fully understand how it works and how to maintain it for it to be successful. Nonetheless, there are many resources and professionals to help walk you through the process. And doing so can be beneficial in the long run.
Why borrow from whole life insurance policies?
A whole life insurance policy has a guaranteed rate of return. The cash value grows tax-free, and there are additional opportunities for growth through dividends and paid-up addition riders. In addition, policyholders do not need to wait until death to access the money, so they can spend money while making money.
These are all great benefits; however, one of the most significant ones is allowing for more control over finances. The policyholder has complete ownership with whole life insurance instead of a third-party institution. This means they have control over all investments and flexibility to cater to personal needs.
Learn more about borrowing from a whole life policy
The Living Wealth team is there to guide you through your journey to financial freedom. Our website is filled with great infinite banking resources to get you started, and our team of experts is there to help you every step of the way. Here are some handy learning resources that you can access to get your questions answered:
- Podcast episode about borrowing from a whole life policy
- Our free infinite banking concept beginner’s course
- Our free infinite banking ebooks
- Read our blog
- See our training videos
- Book a free call with our infinite banking experts
- Subscribe to our infinite banking podcast called Dollars and Nonsense.
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