As you think about putting your money to work in two places at one time by using The Double Play, you may find yourself wondering, “How much can I borrow from my Life Insurance policy?” The purpose of this article is to answer that question. I want to show you how big of a Policy Loan you can take relative to the Premium.
Before we begin, I just want to clarify that all Policy Loans are loans against the Cash Value, not “From” the Cash Value. Unfortunately, no one is searching Google for that phrase. They are searching for “How much can I borrow from my Life Insurance Policy”.
It’s important to realize that Maximum Over-funded Life Insurance policies, both Whole Life and Indexed Universal Life, offer unique opportunities with policy loans. These policies and loans serve as powerful tools for real estate investors. The Double Play, allows you to leverage your policy’s Cash Value for investments while still benefiting from the policy’s Cash Value growth. That means your money is literally working in two places at one time.
Need a primer?: “How Life Insurance Works?”
The Power of Maximum Over-Funded Policies
It’s important to understand that only Maximum Over-funded Life Insurance allows for the largest policy loans. When you choose a Maximum Over-funded policy, you’ll find that it dramatically increases your borrowing capacity. You should be aware that when designed properly, you can borrow about 80-85% of your Premium amount almost immediately. This high loan-to-premium ratio sets these policies apart from traditional Life Insurance.
Beware of “Over-funded” policies. You may have heard of “Infinite Banking”, “Bank on Yourself”, or “Be Your Own Bank”. It’s important to recognize that these are only “Over-funded” Whole Life policies. They are not Maximum Over-funded Life Insurance. They typically offer loans topping off at only 60-65% of your Premium. These policies are left under-funded on purpose so their Policy Owners can pretend to pay themselves interest on their loans. This “interest” is really just extra premium that could have been put into the policy at inception.
A Word About Whole Life and Indexed Universal Life
I want to emphasize that Policy Loans work the same for both Whole Life and Indexed Universal Life. This means that your choice of policy should come down to your comfort level with the volatility of interest-crediting in an Indexed Universal Life.
Key Features for Optimal Borrowing
To achieve this level of borrowing power, understand that your policy must have
Maximum Cash Value
The policy must be designed with the lowest legal Death Benefit for the Premium.
No Surrender Charges
You need to be aware that some companies offer a rider that waives surrender charges. Not every company offers this rider, so be sure to work with an agent who understands this. I should point out that most of the Cash Value in a Whole Life Policy comes from Paid-up Additions. Paid-up Additions are liquid immediately.
Favorable Loan Terms
It’s important to realize that not every company has favorable loan terms. Here are some things to consider:
Rates
You are ideally looking for a policy where the loan rate is very low compared to the Dividend or Interest Crediting Rates. Some Whole Life Policies have very high interest fixed loan options. I’ve seen policies with an 8% fixed loan option! That will not work for The Double Play.
Look for a policy with a Variable Loan option with the interest rate pegged to the Moody’s Corporate Bond Yield.
Availability of a Variable Loan
Some companies do not offer variable loans right away. They make you wait for some number of years before you can take a variable loan.
Direct vs Non-direct Recognition Loans
There is a ton of misinformation on this subject online. The bottom line is this: when you are doing The Double Play, you NEED a Non-direct Recognition loan. The reason is simple: you want your money working in two places at one time. A company with a Direct Recognition loan DOES NOT credit Dividends on the Cash Value securing a policy loan. It “directly recognizes” the loan and treats it as if the Cash Value was gone. THAT is a “Single Play”, not a Double Play.
You’ll find that these features work together to optimize The Double Play right from the start.
Example
Let’s take a look at what Properly-designed, Maximum Over-funded Life Insurance looks like:
These numbers were extracted from an actual policy illustration I prepared for a 60 year old client. Please don’t dwell on the large premium. People who understand how this works sometimes want to commit as much to it as they can afford. I just want you to understand that the ratios between Premium and Cash Value will be roughly the same for every policy regardless of the premium amount. This is a nice round number that lets you see the Cash Value in percentage terms.
The columns show the Premium, the Cash Value, Surrender Value and Death Benefit. I’ve also added a column that sums up the total Policy Charges. The borrowing limit is the Premium less the policy charges. As long as you don’t borrow more than this amount, there will be enough Cash Value to cover the Policy Charges. It’s important to know that Policy Charges are taken out in monthly increments and sum to the total shown. That means there will be much more Cash Value at policy inception. Don’t get excited and borrow against all of it!!!
Important to Know
It’s imperative that you understand that when you take a policy loan, you’re borrowing against your Cash Value, not withdrawing it. The title of this article was only for the search engines. It’s also important to know that:
1. The insurance company uses your Cash Value as collateral for the policy loan.
2. You’ll pay interest on the policy loan, but the Cash Value continues to grow.
3. Policy loan interest rates are currently lower than bank loans. But this is not always the case.
It’s important to realize that this structure allows you to access funds while keeping your policy intact.
Cautions and Considerations
While policy loans offer significant benefits, you should be aware of potential pitfalls:
Insurance company fees:
It’s important to understand that these erode your Cash Value over time. Just be aware that you may look at your account online and notice that you have much more Cash Value than your illustration shows. Just realize that the fees are withdrawn in monthly increments from your policy. That means that you may not leave enough unsecured cash to cover the expenses if you take too much. This could lead to a policy lapse.
Loan limits
Know that borrowing too much can jeopardize your policy. The key thing to remember is that if you don’t pay the interest, the Insurance Company will loan you more to pay themselves what is owed.1 If you don’t have the collateral to justify that new loan, the policy will lapse.
Tax implications
It’s important to realize that excessive borrowing can lead to a taxable event if your policy lapses.
Always keep your agent up to date on what you are doing. They may be able to stop you from making a costly mistake.
Conclusion
The goal of this article was to answer the question: “How much can I borrow from my Life insurance policy?”. As you’ve learned, Maximum Over-funded Life Insurance policies offer substantial borrowing potential. Remember that with the right design, you can access up to 80-85% of your premium almost immediately. However, always keep in mind the importance of careful management and professional guidance.
By understanding policy loans and their potential, you’re equipping yourself with powerful financial tools. Whether you’re considering real estate investments or other financial strategies, realize that your Life Insurance policy can be more than just protection – it can be a dynamic part of your wealth-building strategy.
Notes:
(1) Read the actual State Statutes that require that Insurance Companies must loan money to the policy owner to cover the interest on the loan. See Para. 2 here.
