A great reason to have whole life insurance in your plan is the banking factor. Whole life insurance policies have a cash value account and a policy loan feature. There are no stipulations regarding the use of a policy’s cash values. You don’t have to qualify to use your own funds. No one will ask what you are using them for. You have full liquidity, use and control of the cash values in your policy. In fact, the policyholder has the first right to the cash values. By taking a policy loan from yourself, you are able to use the funds as you see fit in your personal life and business. Whole life insurance policies do not have self-dealing laws like IRA’s.
When we use these policies for banking purposes we actually promote and endorse self-dealing. Why? By borrowing from yourself and paying yourself back in lieu of borrowing from a traditional bank, we become the banker. We control the terms of the loan. More importantly, instead of paying interest to the bank, we recapture that interest and pay it back to ourselves. The money that flows out to pay your loans is getting paid back to you. It’s like pulling it from your left pocket and placing it in your right. As your policy, or personal bank, grows you can begin to self-finance virtually anything. The opportunities are infinite. Since whole life insurance policies are structured differently than bank loans, the principal is reduced quicker when comparing the same loan terms. A loan that gets paid off quicker means that less payments are made. When less payments are made more money is saved. As the banking cycle is repeated within a whole life insurance policy, the cash values, dividends and death benefit all grow. Therefore, this feature has become the focus of my clients.
Scott Storace
Tags: cash value, infinite banking, whole life
Hi Scott,
I found your site on a Google search and am enjoying your blog. You state, in this blog post, that whole life insurance policy loans are structured differently than bank loans which results in a faster payoff.
Can you clarify what the difference is please?
Thanks!
Hi Travis,
That’s correct. Policy loans are more similar to Home Equity Lines of Credit. You only pay interest on the outstanding amount. So, when you make a payment back to the policy it will reduce your principal and you’ll only be paying interest on the new principal balance. This means that more of your payments go towards the principal and less towards the interest. Over time, your principal gets reduced quicker than with a straight amortized loan. Sometimes the difference is staggering, other times, not so much. Depends on the scenario.
It’s actually a lot of fun for me to share the comparisons with clients so they can see how changing their HOW not their WHAT can have a huge impact on their bottom line.
I hope that answers your question. If not, feel free to respond.
All the best!
Scott
Hi Scott,
Thank you for your response – it was helpful… Perhaps, on a future blog, you might show us an example of the difference between an amortized loan and this loan situation you are describing.
Thanks again!