Okay so we are going to take a look at a fun topic policy loans right when I have a dividend
paying Whole Life Insurance policy when I take loans how does it work we are going to actually
conduct a series here so you will see several videos that follow this one
that go through a variety of commonly asked questions such as what is the loan interest rate?
When can I borrow? How much can I borrow? Are repayments required if I go Variable or Fixed? As
far as my interest rate is concerned does that impact the policy being Non-Direct or Direct
recognition? We're going to look into Non-Direct and Rirect Recognition a little bit we're going
to go into quite a bit of detail regarding policy loans really for the purpose of being educated
if I'm considering a policy loan at any point in time and I want more information around it
whether I'm in the industry and I want to educate my clients or if I'm interested as a policyholder
or as a consumer maybe you're working with us and considering a policy we want to make sure that you
are properly educated. So let's get into it with the overview video we are going to touch on the
basics here so let's assume that I have a dividend paying whole life insurance policy and we're going
to pretend that the dividend rate is six percent could be five percent really doesn't matter but
we're going to assume a dividend rate of six percent I have cash value of a hundred thousand
my death benefit is five hundred thousand the purpose of this video as we go through this
example is to help one understand what the benefits are to policy loans how it impacts
me as the policyholder or you as the policyholder and then how it also impacts the insurance company
remember insurance companies are very good at making money so we want to understand
the pros and cons on their side as well so with the policy I've got 100K in cash I elect to pull
out 500 I have a death benefit of 500,000 and I'm going to loan out $50,000 so what I can borrow
the gauge that determines how much I can borrow call it the equity is my cash value so
I'm going to loan out $50,000 and we're going to assume an interest rate of five percent
that the insurance company carries okay so in this example over here what will happen here
is if I had a hundred thousand dollars to start I loaned fifty thousand dollars
that means I have fifty thousand dollars of call remaining equity that's the remaining Cash Value
that I can access if I want to and a fifty thousand dollar loan outstanding here's the
thing when I pay any amount of money into a life insurance policy if I'm growing the cash value
once a dollar passes through the cash value of a life insurance policy regardless if I
just let that dollar sit and grow and earn call it six percent or earn a six percent dividend
or if I decide to loan money out I will continue to yield that six percent dividend
on any money in cash value and any money I've loaned out another way to put it is that
there's no lost opportunity cost the question we always receive there is how how does an insurance
company and why does an insurance company do that so how they do it is one there is a cost
to borrow so when I loan for my life insurance policy the loan interest rate is five percent
think of it this way if you're new to this concept and learning about life insurance is
if you own a home or a piece of real estate that is appreciating it call it five percent
if you take a line of credit or mortgage against that property there is going to be a cost to
borrow for that line of credit perhaps the loan interest rate on that is three or four percent
I'm going to pay loan interest to the lender on my line of credit while at the same time
I continue to yield appreciation on my entire piece of property the entire real estate value
so entire real estate value appreciates while I pay interest only on the loan amount very
very similar with a Cash Value life insurance policy how the insurance company does this
is really they collateralize the death benefit think of it this way
as a life insurance company what is their first and foremost obligation what is their
primary concern to pay life insurance claims so if I die without a loan outstanding in
this example how much do they pay out five hundred thousand dollars if I borrow fifty
thousand dollars out and I die the next day how much does the insurance company pay out
four hundred fifty thousand dollars they are on the hook for fifty thousand dollars less
so what they're doing is they're holding my death benefit as collateral but the advantage for me as
the policyholder is I continue to earn that six percent dividend on any money in cash value and
the outstanding loan balance again there's no lost opportunity cost I continue to yield that
compounding on my entire bucket of money let's demonstrate with a quick example here so here is
a common sheet that will often use to demonstrate how policy loans work we have a 45 year old male
paying in a total of $250,000 any time we look at how policy loans work what I love to do is show
the exact same policy when I just pay money in and let it sit and grow meaning if I never touch it
what does the policy grow to and why I like to do that is when we actually compare it to
to an example when we borrow and then repay we get to see the actual impact we're going to break down
the loan interest cost here as well so in this example I pay in fifty thousand dollars for five
years nothing thereafter here's my dividend column the guarantee is not included in that column
break even year five non-MEC all that good stuff what I want to look at here though is
the exact same policy you can see it's the exact same policy look by year three even
years one through four everything's identical the difference is as follows I take out a policy loan
in year five of two hundred thousand dollars so my question as the policyholder if this is
my actual policy I wanna know what is the impact that me loaning that two hundred thousand dollars
has on my overall policy the immediate growth and the long-term growth that's what I want to know so
I take that $200,000 out the gauge that determines how much I can borrow is what the cash value
cash value is 53 dollars in this example it was 263. So you see my Cash Value call it my
equity decreases as I've borrowed against it as I borrowed against the policy
now they are also going to collateralize my death benefit so my death benefit was 1 million 50,000
dropped down to $850,000. Dollar for dollar reduction and again why we put this next
to the growth example is I can compare I get a direct side-by-side comparison
so there's my reduction there now in this example we are going to repay it we're going to cover
loan repayments in a future video but here we repay it rather aggressively the loan interest
I do want to want to disclose this this is five percent on this example so what happens is as
I make a fifty thousand dollar loan payment that fifty thousand dollar loan payment first
is applied toward the interest ten thousand dollars and then the rest is applied toward
the loan balance that's why it's 160 at the end of year six same thing happens the next year first 50,000
applied towards the 8,000 alone interest the rest applied toward the principal it is paid down
by year 10 in this example now we have the Cash Value highlighted in yellow in year 10. Let's
take note of the death benefit as well 325 in cash 930 and death benefit how does that
look compared to the example when I just paid money in and let it sit and grow look at this
identical values
and you'll see this in the dividend columns as well
if we were to compare these those values never change we pulled this directly from the
software with this particular insurance company and simplified it with these spreadsheets
point being here no lost opportunity cost going back to how policy loans work remember once a
dollar passes through a policy regardless if we just let it sit and grow or if we borrowed against
it borrow against it there's no lost opportunity cost I continue to receive that compounding
if I ever pay it back we repeat the cycle down here but with a 300k loan when it is repaid
Cash Value and death benefit again fully restored
to exactly what it would have been if I never touched it in the first place so we are going
to get into more detail we're going to start addressing the questions that have come up uh
recently and really over the years on policy loans next but hopefully this video helped as far as
providing a nice overview and we'll see in the next video hey guys Steve Parisi here
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