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.
Life insurance is a contract between two parties, the policyholder and the insurer. The policyholder pays a premium to the insurer, and then the insurer offers a benefit when the policyholder dies. The benefit is a sum of money intended to ensure financial security to dependents of the policyholder after their death. In this article, we will look at specific types of life insurance called whole life.
But first, let’s look at life insurance in general and then we will get into types of whole life insurance policies.
Essentially, life insurance provides security. It allows for individuals to have a piece of mind knowing that their family, kin, and other dependents will not face a significant financial burden in the event of their death. Unfortunately, all life insurance policies are not created equal. It is essential to understand which policies allow you to maximize your benefits and suit your individual needs.
Examples of life insurance policies
Examples of life insurance policies include term life, universal life, variable universal life, whole life, and many more. Each policy has advantages and disadvantages. This article’s focus is on whole life insurance.
The insurer for life insurance is often a third-party such as a bank. With whole life insurance, the policyholder has complete ownership. This ownership enables you to have more control of your investment and gives you the flexibility to cater the policy to your personal needs. For example, policyholders can borrow against the premiums you have already paid. You are not limited to waiting until death to have access to your money.
How whole life insurance differs
Whole life insurance also differs from other policies in that it offers a fixed benefit. (This is what Wikipedia says about it.) With some life insurance policies, you pay into it with the hope that there will be a significant amount of money received. However, the exact amount you will receive upon death and/or at the end of the policy may is not guaranteed, nor is it known beforehand. Whole life insurance eliminates the guesswork by providing a guaranteed cash value that remains the same throughout the contract, providing peace of mind. It also allows for accurate planning.
Another perk of a whole life insurance policy is that the money grows tax-free. This means the growth of the policy is not dependent on the IRS and the federal government. There are many advantages to having a whole life policy. However, there are some downsides. To reap these benefits, you are often required to pay higher premiums and extra fees.
Additionally, it is a more complicated option, which may be hard to benefit from without the help of a professional. Nonetheless, this policy has been around for over 100 years and is proven to have worked for many people. It gives you control of your contract and ensures you are reaping the benefits instead of a third-party insurer. Therefore, it can be an excellent investment to get you towards financial freedom and security.
All whole life insurance policies are not created equally. There is a wide variety of options to suit your individual needs. Below is a deeper dive into the different types of whole life policies.
Types of Whole Life Insurance Policies:
Let’s look at the types of whole life insurance policies available in the marketplace:
Non-participating Whole Life
A non-participating whole life policy is one of the more common policies people choose. In this policy, you are not participating in investment activities. You have a fixed death benefit, guaranteed cash value, and level premiums. It is a lower cost and lower risk, but it may not see as much growth as other options.
Participating Whole Life
A participating whole life policy, you are participating in investment activities through dividends. A dividend is a sum of money given to members of the company and/or shareholders. Essentially, when the investments do well, the policyholder receives more money. Premiums are often higher with the policy because of the potential for growth. However, it is a bit of a higher risk because dividends are not guaranteed.
Single-Premium Whole Life
In this policy, you pay a lump sum amount to purchase the policy upfront. This is often lower risk because you are deciding how much you would like to have in your death benefit; it is dependent on how much you invest initially. The option has excellent growth potential. The earlier it is purchased, the longer it can have to build-up. A downside to this option is the high cost, and you are charged more substantial fees for canceling the policy within the first few years.
Level Premium Whole Life
Level Premium Whole Life is also a common policy choice. In this policy, premiums are calculated based on the entire duration of the contract or the policyholder’s life. This option offers stability and consistency. The premiums are the same every pay period until the policyholder dies. Additionally, you have the option to pay for a shorter term (ex. 10 years) to fit your needs. It is also a lower risk because the premium price does not change unless specified by the policyholder.
Indeterminate Premium Whole Life
In this policy, the premium payment varies and is based on the performance and projections of investments. If they are doing well, then the policyholder will pay a lower premium. When they are not doing well, premiums go up. However, the premium cost can not exceed the maximum amount. The amount is set at the time the policy is purchased.
Whole Life Economic
This policy works similarly to participating whole life insurance through the use of dividends. However, dividends are used to buy additional life insurance. A benefit of this option is that benefits can grow if performance and projections are doing well. However, it can also decrease if they are not doing well.
Living Wealth tips for developing a whole life insurance policy
Living Wealth believes that to maximize the benefits of your whole life policy; you should purchase the policy with a mutual company and add a paid-up addition (PUA) rider to the policy. A mutual company is one that is not controlled by the stock market. When you put your policy into the hand of a stock company, you do not have a say in how your money is used. Additionally, the extra money made through the investments goes to the shareholders of the company. In a mutual company, the owner is the one who buys the policy – you. This means you can participate directly in the profits and dividends. Moreover, the profits go to you instead of the stockholders.
A paid-up addition (PUA) rider allows for the policyholder to add benefits to the existing policy. This is achieved by buying additional coverage with dividends. By doing this, you are increasing the potential for growth as PUA riders can also increase in value as time goes on. Essentially this helps you add value and cash to an existing policy.
Overall, whether you take these tips or choose to purchase one of the existing types discussed above, whole life insurance is a good option for many. It is generally higher cost, but this price point allows for greater stability, control, flexibility, and potential for growth. This provides peace of mind knowing that your dependents will be taken care of after your death.
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