Policy Loan in Action

This screen provides a graphic illustration of the dynamics involved in the use of policy loans.

Let's 'zoom out' and see how policy loan interactions work from a higher level. Let's again assume that you have existing collateral capacity in a life insurance contract. The life insurance company calls the cash in that contract - cash value.

You want to buy a car, so what do you do? You call/fax the life insurance company, the financial institution in this case, and ask for the money. They look at your cash value and they send you a check. At the same time they create an interest-only loan, tell you how much interest they are going to charge you and they create a lien against your collateral position (the cash value in your account) the non-pledged cash value in your policy is your remaining collateral capacity.

You are going to make payments to pay back the loan. However, with the insurance company, you'll notice they are non-structured payments - meaning you're not under any obligation or time period to put the money back. Now you're going to want to put the money back as quickly as you can because any interest paid, even to the insurance company, is interest lost.  And if we have an expense with interest we are paying, remember we're not only losing the interest, but the opportunity cost on the interest as well. So to minimize the loss, we would pay back that loan as fast as we possibly can.

Notice that nothing happened to that contract. The money did not come out of the policy, and the money you pay back is not going into your policy. It's going to the insurance company.

So permanent insurance, when designed and utilized properly - meaning not any generic or average policy, but a policy specifically designed to perform at it's maximum potential, can provide stable growth, cash value for collateralization, guaranteed loan access (meaning you can't be turned down if you have the available collateral capacity), no taxes on growth in the contract or the death benefits, and a life insurance policy can provide additional benefits with the addition of riders - such as disability waivers on contributions.

All in all, permanent life insurance performs very well in this capacity.

No math is presented on this screen.