Are you curious about the seemingly paradoxical concept of your life insurance cash value growing while you have an outstanding policy loan? Many individuals find this aspect of life insurance perplexing, but it’s a powerful feature that can enhance your financial strategy significantly. In this post, we’ll unravel the mystery and shed light on why your policy’s cash value can continue to earn dividends or interest crediting after you “take out” a policy loan.
Understanding the Mechanism:
The first step to comprehending this concept is to understand the underlying mechanism of life insurance policies. When you take out a policy, you pay premiums, a portion of which goes toward funding the death benefit, while the rest accumulates as your cash value. The insurance company invests their reserves in various assets, such as bonds, to generate returns.
Dividends and Interest Crediting:
The magic happens because life insurance companies generate profits from their investments. More importantly, the insurance company allocates a percentage of the profit to each policy in the form of dividends or interest crediting. These returns are separate from your policy’s cash value growth and can be a significant source of income over time.
Understanding Policy Loans:
Now, let’s introduce the policy loan element. When you “take out” a loan against your life insurance policy, it’s important to understand that you’re borrowing funds from the insurance company. However, your cash value continues to serve as collateral for this loan. This means that your cash value never leaves the policy. You are not “Taking out” your cash value.
More Info: Life Insurance Statutes (FL)
The Key Insight:
Here’s the crucial insight that clarifies the mystery: the dividends or interest crediting on your cash value are determined based on the total cash value, not just the net cash value after deducting the loan amount. This means that even though you have a policy loan, the insurance company continues to calculate returns on the full cash value, including the portion that’s serving as collateral.
In other words, your policy’s cash value growth isn’t directly impacted by the loan. Since the cash value never leaves the policy, 100% of it continues to benefit from the dividends and interest crediting.
The Benefits of This Mechanism:
Stable Growth: Your policy’s cash value can experience relatively stable growth, even when you’ve taken out a loan. This stability can provide financial security and help you meet your long-term financial goals.
Flexibility: Policy loans offer flexibility. This flexibility allows you to access funds for various purposes, including real estate investments. These loans do not disrupt the growth of your cash value.
Your policy can earn dividends or interest crediting while you have a loan outstanding. This is a very unique and powerful feature of these policies. It allows you to leverage your policy’s cash value for immediate financial needs while still benefiting from long-term growth opportunities. Understanding this mechanism can empower you to make informed financial decisions and maximize the potential of your life insurance policy.
Disclaimer: This blog post is for educational purposes only and does not constitute financial or investment advice.