Why Making Purchases With a Life Insurance Policy Loan Makes Sense

joshua daniel 1Let me tell you about Jim.

Jim is 55, and Jim is pretty mad.

I just got done reading an email from him and, he was in a fury, a bit humorous, but the angry overtones were definitely there. He’s mad at himself and the world that he didn’t understand the concept of compound interest and how to make purchases years ago.

Warning: The concept I’m about to teach you may change your life (or make you angry).

You see, Jim, like everyone else, had to buy cars to live. He’s older, so he has been buying cars for the last 25 years. And he is just now realizing how much money he has lost because he didn’t put compounding interest on his side. He’s been paying cash because he was told “it was the best thing to do.”

But, the question is, what do the wealthy do differently?

Quickly, if you don’t understand the basics of high cash value whole life insurance, you need to sign up and watch our videos first by clicking here.

Life insurance offers us a place to store our money where it can grow and provide us with benefits. We have access to that money through policy loans.

However, often times I feel my greatest disconnect with people I meet with comes when we begin to talk about policy loans. People start to wonder, “if it’s my money, why would I ever want to take a ‘loan’ from the life insurance company?”

It’s a good question, and one that can be difficult to understand in a phone call.

But there is a reason, and a very strong reason, why letting your money compound, and taking a policy loan, is much better for you in the long run.

And especially better than paying cash.

I’m a numbers guy, so let me start with some numbers. I’m using a 35 year old who wants to save up $25,000 over a 5 year period to buy a car.

What he wants to do is this: buy 1 car every 5 years; starting at year 5 (after he has saved up the initial $25,000).

What are his options? He can save money into a savings account, and buy his car with cash, or, he can save up money in a cash value life insurance policy, and take a loan.

Now, the first scenario, the savings account scenario, he won’t pay any interest, but he won’t earn interest (maybe 1% taxable) on that money either. So, at the end of his life, he hasn’t paid any interest, but he has no money to show for it.

(It’s important to note that, even though he isn’t paying interest, he is still making a monthly payment of $416.66 a month to save up the $25,000 dollars to purchase each car.)

In our second example, it will cost him more money, of course. Today, life insurance policy loan rates are at 5%. His monthly payment will be $471.78 a month. Over the lifetime of the loan, he will pay $3,306.85 in interest payments.

I’ve run an actual illustration for today. The point of all this is, “am I going to make more money than I put in?”

The answer is, yes (or why would I post about it?).

Why are you going to have more money? Because you have compound interest working for you. As time goes on, interest compounds on interest.

Here are the illustration numbers. (We’ll start at year 10, after we have paid back the first car loan. Remember, it took us 5 years to save the money initially. And obviously, this needs to be a properly structured high cash value whole life insurance policy to make sense.)

_Car #_ _Year_ _Cash Value_ _Interest Paid_
Car 1
Car 2
Car 3
Car 4
Car 5

I just want to make it clear that this is all based on only $25,000 dollars going into this life insurance policy one time, and compounding from there. There is no new money going into this policy after the initial contributions.

The real difference is the fact that your money is compounding, uninterrupted, inside your life insurance policy. Sure, it takes some time to build. But during this entire time it’s also providing you a death benefit.

When this guy from our example is 70, and time to retire, he now has $131,803 in his cash value.

Compare that to the guy who paid cash. He has 0 dollars, because he saved and spent it all 5 times.

It’s a huge difference. Yes, it costs you a little more. But can $16,500 really be viewed as a cost if, when it’s all over, you have $106,803 extra for retirement?

But in reality, it all boils down to human nature. Parkinson’s law says, “expenditures rise to meet income.” The opposite is also true. If your car payment goes up another 50 dollars a month, your expenses will adjust to match. The reality is, sure, if you are going to force yourself to put 50 extra dollars into a savings account every month, you will be better off. But the fact is, no one does.

But the other stark difference is the whole life insurance itself as a vehicle. It has been proven time and time again that whole life insurance, compared to any other safe savings vehicle, has much better benefits and a much higher rate of return.

The wealthy do things differently, that’s what makes them wealthy. This one smart, and simple, change can help you put a lot more money in your pocket for your future. This is exactly why I will always choose taking a life insurance policy loan over paying cash.

16 thoughts on “Why Making Purchases With a Life Insurance Policy Loan Makes Sense

  1. Thanks for the information. I like the way you compared life insurance to spending money on cars. It appears to me too often that people see cars as a need and savings and having their money grow as something only rich and wealthy people do. You can get there if you did some of the same things. I am still learning about the realm of life insurance.

    1. Thanks Thomas! The wealthy do things just a little bit differently. But that small difference can mean a huge difference in the long run because compound interest, on the long scale, gives you such a huge boost.

  2. I’m still just a little perplexed. If I borrow $25,000 from a policy that cost me 5% to borrow and I’m told to pay say 8% the 3% difference is my money or added capital. So if at the end of the payment cycle the 25k is repaid plus the 8% I have $xx,xxx. Why do I need an insurance policy to do this? Why can’t I do this with my own bank account? It just seems that the increase in policy value is the additional 3% I contributed or forced myself to save? And if I do this five times in a policy sure I’ll have xx amount of money, but I had to spend xx amount each year on a premium. I just don’t see how without my 3% addition it really is a better option.

    1. I don’t think you really read the post, or you are a bit confused. There is no extra money going in. We aren’t paying ourselves more interest in any way.

      It’s simple. A life insurance policy is growing at around 5% right now, a bank account is getting 1%. Sure you can do it with a bank account, but you won’t have a very useful result.

  3. Hello – we talked on the phone a week or two ago. Just starting to learn about this stuff. Just a thought here. What if… This is kind of far-fetched, but could someone starting out decide he’s going to start saving for a car by paying life insurance premiums instead of saving up in his bank account. Could someone actually take out a policy for $416 a month? I guess so? Then either way, banking or “insurancing,” he’d wait 5 years. He buys the car. If he’s a saver he starts saving for his next car right away so he can buy the next car in 5 years. If he has the insurance policy he takes the loan and starts paying that loan. Can he stop paying the premium that he’s been paying to build the funds to be able to borrow? He’d be treating this project as having no life insurance aspect at all this way. Or does he really have to keep both payments going — insurance premium and now the loan payment? I’m curious how far such a thing could be structured. The books I’m reading with their case studies like to show how different situations can be addressed with these policies, it seems there’s an adjustment for everything! Anyway, the saver in the bank doesn’t have insurance to consider, he’s decided he just wants the car, no debt either, so no other payment than car related. (And there’s the third option that doesn’t save at all, the financed option that gets the car right away.) I know it sounds silly to buy life insurance without wanting or considering the life insurance, but there you are. It’s just a thought experiment to see how far this could go. I know I didn’t think about saving when I was young, much less insurance. And when I thought about such things, I couldn’t see how to commit the money. But life forces you to pay or save. I’m older now, and I perhaps wonder how my younger self could have gotten into saving earlier.

    I just realized that I forgot to consider that the cash value of the policy after 5 years wouldn’t necessarily be 100% of the premiums, so that’s something that would need adjusting. So higher payments for the policyholder. But there are dividends that would be added during those 5 years that the bank saver wouldn’t be getting? Anyway, thanks for helping me think about these things.

    1. Good questions Craig.

      I am using an actual life insurance policy illustration for these numbers. So, yes, we can actually get the policy to a point, in 5 years, where the money is accessible to buy the car. That’s the entire point, and it wouldn’t make sense, comparing apples to apples, if you couldn’t get the money out. Obviously every situation will vary because it is life insurance.

      That being said, in this example I did not illustrate continuing to pay premiums. All we are doing in this example is putting in the initial 25k for the first car purchase and then never putting new money in again. Once we put in the first 25k, we borrow it out and now we begin repaying the loan with our monthly payments. The amount of money in the account would be there whether he took loans or not. So, you can consider the outcome to this example to be the exact same as if he had just put in 25k in a life insurance policy over 5 years, and then never touched it for the rest of his life.

  4. This makes total sense as foreign as the concept is to me. What I’m wondering is do I get both cash value and death benefit or should I say my beneficiary as I would be gone and getting nothing if I’m considering the death benefit.

    1. Ya good question Rae. The cash value is, in definition, the portion of the death benefit that you can liquidate or borrow against. So, the cash value is already included in the death benefit. When you die, your heirs will receive your death benefit, minus any loans you have against the policy.

      1. Makes even more sense now..thx Josh! I really like this concept..still trying to wrap my head around it as I’ve been taught the total opposite. What I appreciate most is you don’t present this as an end all but an option..a successful strategy. Thx again..

  5. So… he pays in 25K, then borrows the full 25K, and pays it back at around the same monthly amount he saved the first 5 years? Seems like he’s got about 50K into it but driving a 25K vehicle. You said there’s no more contribution after the initial 25K, but where then are the payments going?

    Second question: once the 25K is in and then taken out as a loan, what principle is gaining interest? The 25K???

    I really want to “get this”. My gut knows it’s the thing I need to do. But my mind is slowly catching up! My gut is brilliant, my mind needs some hand holding often 🙂

    1. Great question. So, the loan and the payment are completely separate. He puts 25k in the first 5 years. That is it. No more new contributions. Now he takes a loan for 25k from the policy. He is never putting new money into the policy now. Now he is only paying the 25k loan back over 5 years and repeating that cycle over his lifetime.

      If he wanted to, sure, he could pay the 25k loan back AND continue to put 5k new money into his insurance policy. But this would cost him 10k a year and 50k every 5 years, instead of the previous example.

      Now, the interest is earned on the original 25k, whether he has loans out or not. The loan is just a loan. The interest earned is on the 25k in the policy, which remains untouched. The loan is AGAINST the 25k, but does not actually liquidate the 25k.

      1. 1.So… Could he put in 25k, wait 20 years, them borrow 56k? Yes right? Im gathering that the 56k cash value is unaffected in its ability to earn interest as 56k in principle even after the loan. So then could 56k be liquidated again and again. I’m guessing no. So the cash value is at zero after the max loan is taken but somehow still earns interest? I’m clearly not understanding something here.

        2. Are loans taken against the death benefit? But only in the amount allowed by the cash value? If the cash value is, say, 75k and the death bemefit 700k can one borrow up to 70k and NEVER pay it back—just the death benefit would be 700k – loan amt? If the total contribution were 40k in this example then the policy holder just got 35k simply by investing over X amt. years? That’d be great! And in this scenario instead of paying the loan back could one continue to contribute? I’m gathering that one could also pay back the loan (back to the DB face value) and contribute at the same time?

        3. With all the flexibility can one change the monthly contribution amount arbitrarily? What then would a premium really mean if that much flexibility was allowed? On this topic, what happens if one over or under pays the determined monthly contribution (if there is one)?

        I feel close to getting it… But close isn’t good enough. Thanks!!

        1. 1. Yes. He wouldn’t have to wait to borrow it though. But yes, around year 20 he would have around 56k to borrow against. He can borrow 56k, pay it back, borrow it again, pay it back, as many times as he likes. As long as you pay the money back you can continue to borrow against it.

          If you have a bank account with 50k in it and a loan from the bank for 50k, does that mean your bank account is $0. The loan is separate. It’s a loan.

          2. Sure. You can look at it that way. If you die, you get the death benefit, minus any loans taken. He could continue to contribute and pay the loan back.

          3. You can change your premiums if you want. You cannot overpay, you can underpay.

      2. Quick Question. The real issue is that only 80-90 percent of your premium is going to your cash value account. I wish you would have added that to make the scenario more real. So in essence, putting $5000 a year for 5 years to your premium puts you at $21,486 (thats with 4% return, and 80% of your premiums going to cash value, should be 85% but of course the life insurance company has to make money on your premium and the agent) in your cash value account. You would have to pay another $5000 to get your cash value to be around $25,800. So basically, you have to pay $30000 for the first 6 years to have at least 25,000 to take a loan out from. Then, you also forgot that for most policies you can only take a loan out equal to %90 of your cash value so your real loan amount would be just over $23,000 (still not enough for you car). The idea is brilliant and does work but it does cost you quiet a bit a “capitalize” your bank. Once you have the cash value account equal to the amount you put into your premiums (which is around 8 years for most polices) then that is where the real magic happens. I have a high cash value policy that i just started this year for my wife, and will have one for myself next year so i do believe in it, but sometimes the agent doesn’t tell you all the facts that you just have to figure out yourself and that is fine with me. In the end, high cash value policies are awesome, once “capitalized” , and will have amazing growth as time carries on, but it does cost a lot of money upfront.

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