A beautiful feature
to a high cash value life insurance policy
is that you can take policy loans.
If I have a high cash value policy
call it with $100,000 in cash value
that continues to compound
I earn dividends on the full $100,000.
Now if I take a loan
call it of $50,000
I'll continue to earn dividends
on the full $100,000
as if I never took a loan in the first place
that's a nice feature
a lot of people are attracted to it.
What I want to talk about in today's video
is a topic of proper verbiage
meaning when you are going to
take a loan
do you take a loan
or borrow against the cash value
of your life insurance policy
or do you take a loan
or borrow from the cash value
of your life insurance policy?
And for years we got this question
mainly from agents who would say hey
it's borrow against
some would say borrow from
and I would just kind of leave it to say hey
it doesn't really matter
but more recently
we have gotten this question
from some consumers
there's been more noise
or more attention directed toward it
so like okay we can definitely
provide some transparency
around the proper verbiage
and if it really matters.
So when it comes to policy loans
do you borrow from
or do you borrow against
the cash value
of a life insurance policy?
And why this is important
is not really from the consumer standpoint
because it doesn't really matter
meaning if you take a policy loan
it's going to function
how a policy loan functions
from an agent perspective
because this is the financial services industry
there is a measure of compliance
meaning what we say
how we speak the words we choose
are very very important.
So here's my stance on it
it doesn't matter
if I say you borrow against
a life insurance policy
or if you borrow from the cash value
of your life insurance policy
they mean the same thing
from the consumer's perspective.
Now back to the compliance issue
which is very important to touch on
it doesn't matter either
and a nice way to validate that
is looking at insurance companies
and their compliant approved literature
which we always look at
including literature
from the company that is approved
and distributed to agents
to consumers
you can look at contract language
and actual life insurance policies
and here's the thing
you'll see both borrow against
and borrow from
in insurance carriers literature
and you can look at
different insurance companies
and you'll see this to be so so consistent.
So let's take a look here
we're going to look at 2 different companies
what I'm going to begin with
is as follows not this guy
but this guy.
So what we've got here
is an advertising
and marketing compliant standards
for whole life insurance
so this is one of my favorite pieces
I found it I believe it was last year
or may have been actually
more than a year ago
I don't know the point is
this actually gives
not just the proper language
but specific word tracks
and sample language
with respect to
how certain components
of whole life insurance policy
can and cannot be explained
to potential policyholders
if you own a whole life insurance policy.
So as an example
here's premiums
and premium payments
where in the industry
we're often advised
or we are advised
not to refer to a premium payment
as a contribution
because that can be confusing
it makes it sound as if I'm contributing
to a bank account
contributing to a 401(k)
companies don't like that
however if I use distinct language
such as premium contribution
or premium deposit
with the word premium in front of it
it's no problem
and you've got sample language here
that validates it as well
so the point is
we want to make sure we do that research
the same thing with the cash value
sample language
but the purpose of this
today's video
is really to cover what?
Loans
borrow against or borrow from
so here we go
we've got it highlighted in yellow
here is compliant approved language
with respect to
accessing the cash value
through loans or withdrawals
here we go in yellow.
When communicating a policyholder's
ability to withdraw
or borrow from the cash value
of a whole life insurance policy
it goes on with disclosure and such.
Does it say borrow against?
No it says borrow from.
If we look at the sample language
so this refers to
what I an agent would say to you
a potential policyholder
this refers to what is approved
and what do we see?
Cash value accrued over the years
in your life insurance policy
will be an asset at your disposal
that you may withdraw
or borrow from
and assist you in financing a life event
borrow against
borrow from
so again there's a lot of opinions
a lot of things we hear frequently
at the end of the day
if you're a consumer
interested in a policy
again it doesn't matter
here we see borrow from
I try not to get caught up
in the noise too much.
Now let's look at a different company here
a behemoth of a life insurance company
MassMutual
another piece here
this is literature for consumers
with respect to the cash value accumulation
what do you see here?
Whole life policy cash values
can be borrowed from the policy
for any purpose
it can be borrowed against the policy
no no
it says borrowed from the policy
this is from the insurance company
their literature
all compliant approved.
Now look at this piece
life insurance tax advantages
policy cash values
accumulate tax-deferred
and distributions from the policy
distributions from the policy
not against the policy.
Let's continue on here
another piece
I like this piece a lot
because this actually refers to
the example of borrowing against
equity in your home
so do I borrow from a home
or do I borrow against my property
to get a loan from the bank?
Borrow against
and they use that specific language here too
so companies use both of this
both borrow against and borrow from
if you borrow against
the equity of your house
if you choose to borrow part of the value
of your whole life policy
referring to the same analogy there.
Now if we look at another piece here
on borrow against
life insurance buyers guide
anytime you buy a policy
with any company
typically you're provided something
along these lines
look at this
you may borrow against
a policy's cash value by taking a loan
you may borrow against
so what have we seen thus far?
Borrow from
borrow against.
Here's a piece
on MassMutual's dividend history
what do you see here?
If a policyholder
selected the fixed loan rate provision
with their policy
borrowing
what's that word?
From the policy
may impact the investment component
of the dividend
this is specifically referring
to their direct recognition treatment
with MassMutual if you select their
fixed loan interest rate
it's actually the policy becomes
direct recognition
and the dividend is adjusted
but my point
it says borrow from the policy.
Now let's look at one more piece here
this is a resource for individuals and families
so this is available to the public
we can distribute it to anyone
here we go
specific language we see here under loans
let me blow that up a little bit
there we go
what do you notice?
Money borrowed from the policy
and then what do we see here?
Let's look at some of the considerations
when policyholders try to decide
whether to take a withdrawal
and or a loan
from a permanent life insurance policy's
cash value
often we describe how policy loans work
we can borrow from the cash value
borrow against the cash value
borrow from the cash value
take a withdraw and or loan
from the permanent life insurance policy's
cash value
like it doesn't matter
at the end of the day.
For the consumer standpoint
if you're looking at a policy
and you're trying to understand
how policy loans work
here's simply what I would look at
with a policy loan
how does it work?
Well if you have cash value
in this example call it of $100,000
and you don't touch it
let's assume you've got a policy
with a dividend rate of 6%
which means
your net internal rate of return
your net growth rate
will likely be around 4% or so
depending on how many years
you're in the policy
but earning 4%
so we've got that dividend rate of 6%
if I don't touch the money
6% dividend on the full $100,000.
Let's assume
you decide to borrow $50,000
you take a loan of $50,000
what do we see?
There's a cost to borrow
the interest rate may be 4%
which goes to the insurance company
however
the company is going to continue to pay you
that 6% dividend
on the full $100,000
as if you never touched it
in the first place
assuming the policy
is non-direct recognition
direct recognition
will be a little bit differently.
So another way to explain it
is that 6% dividend is still applied
to any money in cash value
I like to refer to this as remaining equity
or outstanding in policy loans.
So as an example
if you were going to repay your policy
your policy loan
let's say you weren't going to touch it
and in 10 years from now
that cash value
was going to be worth $200,000
and I elect to
borrow from the policy $50,000
like I see in this example
then pay it back in 10 years
they'll be worth that same $200,000
meaning loans do not interrupt the compounding
of a policy at all.
So I hope you found this video helpful
if you did please hit the like button
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and as always I hope this helps.
Thanks so much.
Hey guys Steve Parisi here
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