Alright in today's video
we are going to have some fun.
We're going to look at
using a whole life insurance policy
to pay off a mortgage.
This is a concept
a lot of people are interested in
we get this question quite a bit
hey can I use my life insurance policy
particularly the cash value
can I build it up and then borrow against it
to pay off my home?
The answer is yes
however we do want to take a look and see
if that actually makes sense.
So this is based on a key study
of someone who's had a policy now
for 2 full years
they just started policy in year 3
they've been aggressively funding the policy
but we're going to go through a couple things
(1) we'll see
what they actually have in cash value
so we'll see the actual performance
during the 1st and 2nd year
what it looks like moving forward
and then we'll measure
the performance of the policy
and directly compare that with the loan scenario
so we can let the numbers speak to us
and tell us okay this makes sense
or it does not make sense.
So to provide some details on the case here
we've got an age-40 female
but she was 40 years old
when she started the policy
about 2 years ago
so she's 42 now going on 43
but what she's interested in
is using her policy
to pay off her mortgage in full
and she's just about at a point right now
where she can completely pay it off
that's what she wants to do
and a big reason why
is because she doesn't want
to have that obligation to a bank
or to a lender
of constantly making payments
she likes the idea of having that paid off
and then being able to pay her policy back
really at her discretion.
The nice thing is too where interest rates are
her policy loan rate is fixed at 5.66%
and that is a fixed rate so it's locked in.
Now she started her policy 2 years ago
so we are going to review
the actual performance
she's funding it at about $70,000 per year
it's a little bit more than
that she's funding right up to the MEC limit
and we recently had a review meeting
and initially we had set this policy up
to fund for 10 years
however in discussing it
and looking at how she's funding it
she's paying in more
than what the original plan was
funding right up to the MEC limit
so it's performing quite nicely
but what she actually likes the idea of
is instead of following the original 10-year plan
she can actually
get a very similar dollar amount in over 6 years
and then stop altogether
and as we looked at the different options
she saw that and said I like that
that's what I want to do
now after that point in time
she can continue to fund the policy
or she could start a new one
we'll look at that
but what she's interested in
is really maximizing the cash value
and one of my favorite things
to do with these products
if you design them to be flexible
is being able to do things like this
where I've got a plan initially
it was set up
to handle $50,000 per year for 10 years
and from the 1st year
she's been paying in $72,000 and change
right up to the MEC limit
and the company has accepted
the heavy payment
so it's worked out quite nicely for her.
Now her current mortgage balance
it's about $190,000
and she's presently paying
$2,000 per month toward the mortgage
and that's total
that's with everything insurance
and everything involved.
So what we want to look at here
is (1) a direct policy loan
so we're going to look at a policy loan
of $190,000
and then payment options as follows
(1) what does it look like if I pay
exactly what I have been paying
on my mortgage
that $2,000
and pay that now toward my policy loan
just to keep everything exactly the same
show me how much I'm paying
in loan interest in this particular case
and then she can compare it
with how much she's paying in interest
to the bank
and then also an aggressive payback schedule
and what works nicely
the individuals who
fund policies more aggressive
when we see this aggressive payback
what you'll see
is a scenario where after she has
aggressively funded her policy for 6 years
which is what she wants to do
then she's going to redirect cash flow
that she was paying toward
premium and PUA payments
and then apply that toward the loan
so we'll get to see both loan scenarios here
and then the main question is as follows
do the numbers make sense?
And what we're going to look at
is what is the growth on the policy
compared to the loan interest paid on the policy
ready to have some fun?
Alright let's take a look here
so what we've got first is as follows
her policy
in fact let's make this a little bit bigger
because we've just got it on one sheet here
and this first measures the actual performance
so the 1st 2 years you'll see it underlined here
this represents her actual cash values
we pulled these from the annual statements
in the 1st and 2nd year
so actual cash value and actual death benefit
so the 1st year she was 40 years old in 2021
she paid right up to her MEC limit
her MEC space was zero dollars
and zero cents
$72,000 and change
cash value was $65,000 and change
which she paid in $72,000
she had $65,000
the 1st year is the worst year
took a hit there of about $6,800
so here we've got the cash value growth
and this will measure it on a yearly basis
and then here we've got the cash value gain
which will measure
the total cash value gain over time
so for example year 2 which was 2022
we see again she paid in the max
for total payments
are now almost $145,000
cash value was $65,000 and change
it grew to $138,000 and change
what that means
is she got her full $72,000 and change back
plus another $530
so she's over the 1st year which is fantastic
it just gets better from this point in time
however we still need to factor in this
year 2 I gained $530
year 1 I lost $6,800 so I'm still in the red
and we'll see in this scenario 2023
which he just started
her plans to continue to max fund it
break-even point very close to year 3
year 4 she's positive
when she's positive
you'll notice I'm no longer in the red
and the cash value gain column
then fund through age 45
that's policy year 6
she does not pay a penny thereafter
in year 7 the premium is still due
but we exercise what's called a premium offset
that's more so on the agent's end
and then we Illustrated a reduced paid-up
which eliminates the premium
altogether in year 8
which is why we see this death benefit drop here
but those are optional adjustments that we
make that determination
when that time comes
and we often show here's what it looks like
if you keep adding money
and here's what it looks like
if you stop altogether
this way people can see it
before they make a big decision like that.
So this is beneficial
because we see the growth
simply what does my policy look like
when I pay money in and let it sit and grow
this in my opinion is so so valuable to see
before we look at loans
because when I take loans
I want to see the direct impact
that those policy loans
have on my life insurance policy
cash value and death benefit
that's very important.
So let's take a look first at scenario one
which is the example
where we're going to pay the loan off
at $2,000 per month
now this is going to illustrate
a direct policy loan
this policy is with Guardian
one of the major mutual companies
and what do we have here?
On the left is growth
this is the same exact illustration
we just looked at
so this is based on an in-force illustration
with the exception of the 1st 2 years
because those have already happened
if you've ever seen an in-force illustration
it will start in the policy year you're in
so year 3
is at the very top of the in-force illustration
started the policy in January 2021
loan and repay
so she can take a loan and policy year 3
just when I had run this illustration
the earliest we could run it was year 4
she can take it right now no problem
well assuming she
gets the full funding in year 3
as of the day of shooting this video
I don't know if she's done that yet
I know she aggressively has funded the policy
and was eager to add more money
but I've not checked it before shooting this video
in any event it doesn't matter.
So here we've got the $190,000
when that $190,000 is taken
we see the loan balance
of $175,000 and change
why it's $175,000 and change?
Is because she's going to immediately
take that $2,000 per month
that she is paying
toward the bank right now
on her mortgage
and redirect that toward the policy loan
so the $24,000 that's paid toward the loan
but look at this a question comes up here
I took $190,000
my loan balance is $175,000
and I paid $24,000
so it's reduced by a little bit less than $15,000
when I paid $24,000, why is that?
The reason why
is because I've got this loan interest
of just about $10,000 or $9,960
so the $24.000 that I paid
first was applied toward the loan interest
and then the rest toward the balance
which brought it down to $175,000.
Now before we continue on here
as far as continuing year over year
look at this when she pulls the $190,000
the cash value is my equity
that I have access to
whatever your total cash value is
that's the amount that you can borrow
a lot of times you'll see up to about 95%
of whatever the cash value is
with most insurance companies
some are a little bit higher
but $118,000
before I took that loan what was it?
It was $293,000.
How about the death benefit?
So you took a $190,000 loan
pre-loan it was $2,225,000
post loan is $249,000 and change
call it $250,000
why the difference?
The loan balance is the difference
whatever the loan balance is
it will be deducted from the death benefit
sometimes loan interest
will be accounted for in illustrations as well
but anytime I take a loan
the death benefits collateralize dollar for dollar
and I also have to account for the loan interest
that is paid to the insurance company.
The last thing I want to look at here
for policy year 4 when we take this loan out
is this column annual cash value growth
what did I grow by this year?
It's $7,141.
What did I pay in loan interest this year?
It's $9,960.
Did I earn more
or did I pay more in loan interest?
I paid more in loan interest
awareness is key here.
Now in her particular case
we also want to see well
how much was I paying
in loan interest to the bank
especially if I'm
in the early years of the mortgage
yeah you know the answer to that question
however as she continues
to make the $2,000 per month payment
or $24,000 per year
we'll look at it year over year
there's the loan interest paid
here's the growth in the policy
okay now I'm positive
assuming the dividend rate does not change
and I continue on this funding schedule
we have to track the actual results
as time passes
but in this example we pay it back
there's the total interest paid just about $55,000
and what are the total gains
at this point in time?
It's year 14 of $209,000
which is not really a fair comparison
it is because it's the numbers
but why it's not is because that gain
is on my total cash value
whereas that loan interest
was on an initial loan of $190,000
but this is the kind of stuff people like to see
I like to see it
so I can see alright here's my total gains
from using this product
and here's the total interest paid
am I behind or am I ahead?
Now what I also want to hit on is this
look at year 14 when that loan is paid back
what do you notice here?
What was your cash value
before you took a loan?
It was $644,000 and change.
How about after you took a loan
and then paid it back?
It was $647,000 and change
it's a little bit higher.
Fun stuff, right?
The reason why
is because this is an older Guardian product
well it's not that old
it was started before 2022
before the 7702 update was applied
or when insurance companies
updated their products to comply with it
so we've got a loan interest rate
fixed loan at 6%
the dividend rate
is at 5.75%
so what happens
how Guardian functions
is whatever you have in cash value
receives that 5.75% dividend rate
however the outstanding funds
Guardian is a direct recognition company
still receive
so the money that's outstanding in policy loans
still receive a dividend
what Guardian does though
is adjust the dividend rate
to match the loan interest rate
in this case 6%
so there's a slight spread of 25 basis points
based on a gross dividend
which is why I see a slightly higher value here
Guardian practice for a long time
has been to apply a dividend rate
that's equal to the loan rate
so if you look at new Guardian products
it has a fixed loan rate of 5%
so the same occurs
so we'd see the opposite in that case
where the dividend applied
but then it'll be 5%
if you're looking at a new product
but this is an older product
so it's important to mention
that small detail there
I'd want to know.
So here we go that's a nice scenario
let's wrap up with the aggressive paydown
so here is the same scenario
the growth on the left
there we go
but then loan and repay aggressively
specifically what we're going to do here
is take a $190,000 loan
in the 1st year pay just interest
so we're not applying
anything toward the principle
like the last example we just looked at
interest only years 5 and 6
what we're doing
is paying the loan interest
plus applying $24,000 per year
toward the loan balance
and we do that through year 7
so this gives her 1 year of easier payments
because she's aggressively funding her policy
and paying the loan interest
and applying $24,000 per year
toward the loan principle
it's a lot of cash flow she's putting out
which I think she can handle
from her conversations and such
she likes to aggressively pay things down
but in this example year 7
she just assumed okay
let's take your foot off the gas a little bit
let's recover
before we run the next lap around the track
and then during that year
when she's not aggressively adding funds
she'll be able to stockpile more cash
and then just pay the loan off altogether
she can do it however she'd like
for this model I just assume that
because it's cool to see different
what-if scenarios
and because she's paid it back faster
what do we see here?
Well we paid less than loan interest
the last example was over $50,000
here it's about $35,000
at the same time there's my total gain
$68,000 and change
what you could also look at if you'd like
let's put this in a different color
there's my out-of-pocket loan interest each year
1 year too long
and I can compare that every year
with what the policy is growing by.
The last layer to this would be to take
the exact schedule from her bank
which we could run on a calculator to
to see what she's paying in interest to the bank
and then compare
okay how much am I saving in total interest
by executing this strategy
or if I keep it fair at the constant repayment
just of the same thing $2,000 a month
that I'm presently paying toward my mortgage
if I just shift it over to the policy
but in any event
her plans to aggressively pay it down
so it does work out well for her
especially when you add the emotional piece
that she just wants that mortgage paid off
and doesn't have to think about it anymore
with the policy you've got more control
meaning you can pay it back
however and whenever you want
you don't have any late fee notices
or saying please pay now
you're not working with a bank
so that part was very very appealing to her
and she's done a good job
just building up her cash value.
So I hope you enjoyed this video
if you did please hit the like button
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let us know if you have any questions
or comments below
and as always I hope this helps.
Thanks so much.
Hey guys Steve Parisi here
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