Whole life insurance is a very old financial tool, which is offered by companies, some of which are over 150 years old.
I began exploring this financial tool recently, and specifically started analyzing cash value as a financial tool.
What is cash value?
In addition to a portion of your premium being used to pay for the death benefit, a portion goes into a savings account, inside your policy, which accumulates tax free at a compound interest rate determined when you buy your policy, but currently the national average for Mutual life insurance companies is around 4%, with the range being 4-6%.
Do I pay taxes on this savings account?
No, the United States Taxation Department, the IRS specifically excludes this savings account and the compound interest earned, from taxes in its tax code.
May I borrow this money while keeping the policy active?
No. But You can borrow against it. While the amount of your cash value in the policy determines how much you can borrow from the insurance company, you are not actually borrowing your money with policy loans. You are borrowing money from the insurance company general funds. This means your full cash value, regardless of the size of your loans, continues to accumulate cash value.
Why would I want to borrow against my life insurance cash value?
It’s a cheap source of money for investments, purchases, school, unexpected expenses or it can be part of an overall financial plan.
Do I pay interest on the money I borrow?
Yes.
Do I pay a higher interest rate on the money I borrow, then the insurance company pays on my cash value?
Yes.
How can that be a good deal for me?
Two ways:
First interest rate; The rate the insurance company charges you, on a policy loan, should be less then what your bank charges you for the same loan, or you should take the loan from your bank. Most bank consumer loans are 12% to 30% and compound interest. So a policy loan of 6-8% is a better deal based on the interest rate alone.
Second; the policy loan from the insurance company is simple interest and the majority of consumer loans are compound interest. So the interest is compounded daily, so you pay more interest.
I have heard that policy loans can be used to pay down my consumer loan debt?
Yes.
How does this work?
Let’s look at an example: If you have a $2400 credit card balance, which carries a 12% interest rate, which is compound interest. And suppose you can only afford to pay the minimum payment each month of $100.00, of which $50 was interest, so it takes you 48 months to pay it off, for a total of $4800.00 dollars. You can borrow for example $2400.00 from a policy loan at 6% simple interest to payoff a $2400 credit card balance, and now you pay that $100 dollar payment to yourself. You still pay interest, but one half the rate and simple interest, not compound interest, so more of your payment goes to principle, not interest and the debt is retired sooner.
It seems like I am just replacing one debt with another. How does this help me?
You are correct, you are replacing one debt with another. But because you are replacing a 12% interest debt with a 6% interest debt, cutting your interest in half, you are reducing each months interest payment, while simultaneously increasing each months principle payment. This allows you to payoff the debt faster.
The majority of them pay every year and about ten of them have paid dividends every year for 100 years. That means during every financial crisis of the last century these mutual companies have paid a dividend. This means mutual insurance companies like stock dividend companies are a good financial tool to investigate.
Conclusion;
The cash value of a whole life insurance policy has some interesting differences between it and other financial tools, including compound interest, tax free accumulation and guaranteed returns. It is a tool historically used by banks and the wealthy, to accumulate and preserve wealth. Based on my investigations I think you should consider adding this tool to your financial toolbox.
Remember knowledge is power, power brings wealth and wealth brings freedom.
Free yourself.
✍🏼 by Shortsegments.
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