Alright in this video
we are going to provide transparency
around whole life insurance
specifically on the topic
of how loan interest works.
How does it build up over time?
Let's have some fun.
So when it comes
to a whole life insurance policy
a beautiful feature
is that you can borrow against it.
For example
if you have a policy
with $100,000 in cash value
you have access to that cash value anytime
let's assume for the sake of this example
you take a $50,000 loan
when you take that $50,000 loan
a lot of people aren't aware of this
the insurance company
will continue to credit you with dividends
say it's 6% in this example
as if you still had the full
$100,000 in cash value.
Meaning I've got $100,000
I borrow $50,000
but I still earn that 6% dividend
on the full $100,000.
What I like to relate this to is
if I have a home
a piece of property
that's appreciating at 5%
if I take a line of credit
against that property
if I borrow against it
I'm going to have a cost to borrow
that goes where?
To the bank
to the lender
however if the fair market
value of that property
continues to appreciate
it's still in the entire property value
not just the remaining equity
that's how a whole life insurance policy works
with respect to loans.
So on that point
when it comes to the loan interest
which is the purpose of this video
how does that work?
So you take this $50,000 loan
5% loan interest
we're going to assume for this example
often you'll find it lower
on newer policies
issued from 2022 onward
but at 5%
if that's the loan rate you have
of $50,000
that equals what?
$2,500
if you validate that real quick
because I was the kid in school
who always appreciated it
when someone would go through
all of the details
5% of $50,000
is $2,500 okay.
So I took out that $50,000 loan
I've got $50,000 remaining in equity
how does this $2,500
actually build up over time?
That's my question
if I'm the policyholder
if I'm you.
So the terminology
that the insurance company uses
that the industry really uses
is that loan interest accrues
on a daily basis
and the method used
is annual simple interest
so when you borrow against your policy
the loan interest accrues daily
at annual simple interest.
Make sense?
Probably not
it didn't for me the first time I heard it
I was like okay
and then I went and researched it
and rehearsed it a million times
when I say rehearsed it
I researched it so I could understand it
and then rehearsed it
and explaining it properly.
So what this actually means
is if you take this $50,000 loan
you've got $2,500 in loan interest
what would happen here
here's the $2,500
is you would divide that
by 365 days.
Remember that the industry
uses what term?
It accrues daily
at annual simple interest
so when we divide it by 365 days
that's the amount we have
$6 and call it 85 cents
that would accrue each day.
So for example day 1
or day 0 we could call it
your loan balance is $50,000
the next day
if you don't pay that loan off immediately
what would happen
I would have $50,006.85
if I don't do anything for another day
another $6.85 is added
so each day
$6.85 is added
to the loan principal
that happens
up until the policy anniversary date
so I am billed for any loan interest
that has accrued over the course of the year
on that anniversary date.
Now what's important to be aware of there is
if I take a policy loan
on my anniversary date
say it's $50,000
I take that $50,000 loan
over 12 months
what's going to happen?
Well it's going to accrue to $2,500
I have to pay that on the anniversary date
I don't have to
but it is typically in my best interest to do so.
If I were to take a $50,000 loan
6 months prior to my anniversary date
what would happen?
Well interest would accrue
up until my policy anniversary date
whatever amount has accrued
would then be due
which in this particular example
over 6 months would be how much?
Cut that number in half
$12.50.
Now what I do also want to add
is if you don't pay it
it does compound
so what would happen
if we go back to the calculator here
is I've got a $50,000 loan
$50,000 at $2,500 of loan interest
let's assume you don't pay it
so what will happen then
is the policy will borrow
from the cash value
to cover the loan
a loan interest I should say
and now my balance is $52,500.
Here's what's important to be aware of
the same cycle then repeats itself
now my loan balance has accrued
to $52,500
take the same loan interest rate
times 0.05
2,625
you would divide that by 365 days
and that's the new amount
that is added to your balance
day in and day out.
So it is always simple interest
over the course of your policy year
and then if you do not pay
the loan interest
when it is due
it's added to your loan balance.
How that works
is the policy borrows against itself
to cover that actual loan interest bill.
I know that can sometimes be confusing
you can always reach out to us
and we'll be happy to discuss with you
you can always also rewind this video
if that helps as well.
So on that point
just to provide some visuals here
let's take the same example
you take that this $50,000 loan
what happens is
if you took it on day 1
on your anniversary date
so you've got a policy anniversary date
of January 1st
you take a $50,000 loan
on January 1st
January 1st of the next year
or call it December 31st
after a full 12 months
the loan interest
would have accrued to $2,500
that assumes a $50,000 loan.
Now let's assume
you took that loan
still the same date January 1st
but now over 6 months
you decide hey
I sold a piece of property early
I came into a windfall of money
I can pay this loan off
what's my total loan payoff amount?
Well over 6 months
how much loan interest
would have accrued?
Half the amount $12.50
so your loan payoff amount
would be how much?
This plus this $51,250.
Makes sense?
It's interesting, isn't it?
How it works
all the meanwhile
you're still earning that 6% dividend
or that's still being credited
to your full cash value
as if you had the full $100,000.
A nice feature
and we go through this in a lot of our videos
on how policy loans work is
I like to see what a policy
looks like if I just let it sit and grow
and then take that same model
and see what's it look like
when I borrow against it
and don't pay it back
pay interest only
if I pay it back in full
then I see my cash value
and death benefit
fully restored
to what it would have been
as if I never touched it in the first place
really how companies continue
to credit a dividend
on your full cash value
even though you've borrowed against it
is that they are collateralizing
your death benefit
which we cover that in other videos.
So the last point I want to touch on here
hopefully this has been helpful
is that some companies
bill in advance
so what this means
Guardian does this
let's assume the same example
that you have a 5% loan interest bill
or loan interest rate
if you take that $50,000 loan
what will happen
is let's again assume it's January 1st
day 1 of your policy anniversary date
is your day 1 balance
on your statement
or on your online portal
would read $52,500
they bill everything upfront
and some people hear that and say oh
I don't want that
it's confusing
and I think it's a little confusing too.
But with that said how it works is
if you elect to make payments
at any time prior to the anniversary date
you get a refund
for any loan interest
that was built in advance.
As an example
let's assume
that you pay the loan off in full
in 6 months
even though they billed
the $2,500 in advance
on your statement you see $52,500
when you go into your online portal
that's your loan balance
the loan payoff amount
will actually read $51,250.
So if I sent in to pay off my loan $52,500
because the company billed in advance
and that's what I saw in my online portal
I sent a check in for that amount
what would happen
is they would actually give me a refund
of the loan interest
that was billed in advance
but it accounted
for interest billed in advance
all the way up until
my policy anniversary date
and I'm paying it
before my policy anniversary date
that's why they apply the refund
and again that's if a company bills in advance.
So I hope that you found this video helpful
if you did please hit the like button
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reach out if you have any questions at all
and as always
I hope this helps.
Thanks so much.
Hey guys Steve Parisi here
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