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Using Cash Value as Collateral For Life Insurance Loans

Fact Checked by Jason Herring & Barry Brooksby
Licensed Agents & Life Insurance Experts.
Insurance and Estates, a strategic life insurance provider composed of life insurance professionals, is committed to integrity in our editorial standards and transparency in how we receive compensation from our insurance partners.
loans on life insurance cash value

The following article is a transcript from a webinar on Using Life Insurance Policy Loans to Borrow from Life Insurance Companies. In this article, we linked to content that we believe would be helpful to further elucidate our points. We have also added additional content where we felt it would benefit our readers.

For more on this subject, please see our articles Life Insurance Loans and Borrowing Against Your Life Insurance Policy’s Cash Value.

Life Insurance Policy Loans

Steve (00:00):

Welcome to the webinar. Today’s topic, Life Insurance Policy Loans. Excited to bring this topic to you, and I’ve got Barry Brooksby with me, our resident whole life, permanent life expert. Barry, welcome. Thanks for joining us today.

Barry Brooksby (00:14):

Thanks for having me, Steve.

Steve (00:15):

We’re excited about this topic, Life Insurance Policy Loans. Our goal today is to provide an overview of life insurance policy loans. For those of you listening, if you have no knowledge of policy loans, they’re a great aspect of cash value life insurance, and in our opinion, particularly whole life insurance, but really, any kind of cash value life insurance is most likely going to have an option for policy loans.

Steve (00:41):

We want you to understand the important pros and cons of life insurance policy loans, maybe reveal some things that you may not know, including some ideas of how policy loans can be used.

As a bonus, we’ll talk about some of the tax advantages of policy loans. Hopefully by the end of this webinar, you guys will have a good idea of what policy loans are, how you can use them, and how they’re a powerful aspect of using cash value life insurance and particularly high cash value life insurance.

Policy loan, by definition, is really using your cash value as collateral for money that you’re borrowing from the insurance company.

Steve (01:18):

People get that confused. They think they’re either borrowing their own money when they’re not. You’re actually borrowing money from the insurance company using your cash value as collateral in the same way that you might borrow money on a piece of real estate and use your real estate equity as collateral.

That’s the idea behind it, but there’s some major differences in terms of the ease of borrowing against your policy versus real estate and also the exciting part of keeping your money working for you inside of your policy, which is this little part of the definition here about how your policy continues to grow with compound interest, true compounding, particularly if you’re a whole life policy, you do tend to favor whole life when it comes to policy loans.

With that, I’ll pass the baton to you, Barry. You probably want to interject on that topic.

Barry Brooksby (02:08):

Thanks, Steve. One of the things that I hear often, there is a myth out there that people will read on the internet that when you take a policy loan or you pay that loan back, that you are paying that interest to your policy. That isn’t true, so I’m really glad you addressed here that you are taking a loan from the life insurance company’s general account.

The interest you’re paying on that loan does go back to the insurance company, because they’re removing money from their general account that is earning interest. They’re going to charge you interest, but because that money isn’t physically removed from your cash value, you are, in fact, still earning interest and dividends on your total cash value and it is growing at a compound rate.

Steve (02:55):

Yeah. It’s exciting. Barry, we did have a question recently on the website. We had a question about what is the interest or what does an insurance company charge? Do you want to speak to that real quick, in terms of how that interest payments work and if you pay extra interest in and that kind of thing?

Barry Brooksby (03:19):

Yeah, I sure do. Most insurance companies that we work with here at Insurance and Estates and Focus Wealth Group are charging 5% interest. I usually don’t recommend paying more than that. If you have another company out there charging more or you’re considering going with another company that’s charging more, 8% or 9%, you should really reconsider.

When you pay the loan back, that 5% and your cash value is still earning, say 5%, there is an option to pay back more interest as long as you don’t MEC the policy. What I mean is, there are limits to the amount of cash you can get into a policy, and we take care of all this for you with the MEC limits and those guidelines.

Barry Brooksby (04:05):

A lot of people ask, Steve, “Why would I pay myself back? Why would I pay myself back more interest when it’s my money?” Let me give you a couple examples.

Number one, what if you are a doctor or business owner and you’re leasing equipment? You may not realize it, but on the back of that lease, you could be paying 8%, 9%, 10%, 15% interest. All you care about is a payment and your cash flowing into your business. Therefore, you can make that payment.

Well, what I tell business owners or doctors or chiros or dentists is, take a policy loan, buy the equipment with cash and now pay your policy loan back at that 8%, 9%, 10% interest, because you were going to do that anyway. You might as well be an honest banker.

Barry Brooksby (04:53):

The other example is a real estate investor. A lot of real estate investors are out there using private money or hard money and they’ll pay 12% interest, 15% interest, 18% interest. Again, my recommendation is, take a policy loan, use your policy as the bank, as the private lender in that case. Pay yourself back the higher interest.

Now you’re not only earning interest in the policy still, but you’re capitalizing on that higher interest instead of the financial institution capitalizing on the higher interest.

Steve (05:31):

Wow. There you go. You just said so much, Barry. We could obviously talk for a while about this, because it’s such a key part of this strategy. If any of you guys listening have started to look at the infinite banking concept or self-banking.

There’s a lot of other names for the strategy and there are a lot of webinars that we’re focusing specifically on the strategy. Barry, this is fundamental, I think, because you’re talking about really stepping into the shoes, being your own banker, paying yourself back at the market rates of interest that you would pay otherwise. That’s what you’re getting at.

Barry Brooksby (06:08):

Exactly right. Yeah. You be your own bank. You capitalize on growing wealth throughout your life rather than always letting the financial institutions grow wealth.

Steve (06:20):

All right. There are so many things like the velocity of money and there’s just a lot of other topics, but for those of the people listening that are analytical, you might be asking questions.

Barry, you touched on it. How much, if you’re paying yourself more interest, you can do that, but you don’t want to MEC the policy, these kind of questions. Some people may be listening and thinking, how much more interest can I pay myself and put money back into the cash value of the policy?

The reality is, if the company’s charging 5% and they want to pay 10% back because that’s what they would be paying elsewhere, a good portion of that, maybe all of it, can go into the policy, depending on how much extra cash is allowed into the policies. Is that a good way to look at it?

Barry Brooksby (07:12):

That’s right. We would have the company run a MEC test to be certain that the policy isn’t going to MEC and I help clients with all that. If this sounds like Greek to you, don’t worry about it, because I take care of it for you, but we always want to make sure that if you are paying that money back at a higher rate, those loans at a higher rate, we don’t want it to MEC the policy because we want all that cash value growth, Steve, to be tax-free.

Steve (07:39):

Yeah. If you become a modified endowment contract, for those of you guys listening, it just means that you lose some of the advantages of being treated for tax reasons as a life insurance policy. You can certainly look at what a modified endowment contract is.

Like Barry said, he’s an expert at it. We’re not trying to overwhelm you guys. We just want you to know the basic concepts, and this is why you need a true expert really helping you.

We’ve had a lot of people ask us at Insurance and Estates, “I think my agent knows something about this, but can you guys weigh in?” I always emphasize you just really need a person that’s familiar with how to design the policy and how to take advantage of these strategies when you’re talking about policy loans.

Barry Brooksby (08:26):

I agree.

Steve (08:27):

Cash value life insurance, by definition, I wanted to put this in this webinar because when we’re talking about policy loans, we’re talking about, really, life insurance that has cash value accruing. These are policies that offer lifetime benefits because they have, in addition to the death benefit, you’re putting cash into the policy and it’s accruing with tax advantages.

This goes to some of the other recent webinars that Barry and I have done. We did one on stock versus mutual life insurance companies and we’ve done a really great one on dividend-paying whole life insurance, which is really fundamental to building cash value in a predictable way in a life insurance contract.

Another thing is, there are other types. We get a lot of questions on index, universal and variable. Depending on your situation, you may prefer one product or another. We like to try to coach people on whole life because it might be the least understood and offer some advantages that people may not be aware of.

Barry Brooksby (09:31):

Steve, I’ll just chime in real quick with that. The reason we focus on whole life primarily, one, is it’s time tested. It’s been around for over 200 years. We’re working with mutual companies that pay guaranteed returns on the policy plus a dividend, but there is no increase in cost of insurance.

A lot of people out there are hearing about IUL, index universal life or variable universal life. Just be aware that there are increasing costs in those universal life products and they are tied to market-based fluctuations. It’s a product that we don’t sell a whole lot of nor recommend simply because it does have internal problems.

Not all policies are built the same and we certainly do believe that IUL policies have their place. It really comes down to what you want out of your policy. 

Steve (10:19):

When we’re talking about policy loans in particular, Barry, I think you’re hinting at this. The whole life contract, you have fixed costs for life. You might even have limited pay, so you might have, in 10 years, your whole policy’s paid up and it’s still earning returns on the cash. It can really be a nice foundation for doing things like policy loans.

Barry Brooksby (10:44):

Yeah, and you don’t have to worry if you have a policy loan out that your increasing costs are going to blow up your policy, where that could be a factor in an IUL or some type of universal life product.

Steve (10:55):

Yeah, there you go. I look at it as having a good foundation, because if you’ve got this policy loan and then you’ve got a shifting foundation with your policy, that could be a little bit unnerving.

Barry Brooksby (11:05):


Steve (11:07):

Policy loan pros.

The cool thing about policy loans, to me, and I always want to hear Barry unpack this stuff a little bit from his personal, numerous interactions with clients, but your money continues to grow tax-free in your policy even if you have a policy loan.

You could have $100,000 dollars in your policy available and you could take a loan out for $50,000 and the entire $100,000 would continue to earn a return or earn dividends based on history.

There’s a whole thing around dividends and understanding dividends. Barry talks about that a lot. Barry, you want to mention that or talk about any other aspect about these pros?

Barry Brooksby (11:48):

Yeah, and let’s just step away for a minute to my whiteboard, because I want to draw something out and put a visual with this. In your example that you just mentioned, let’s assume, again, there’s $100,000 dollars of cash value and you decide to take a $50,000 loan and the loan can be for anything.

What’s great about this, and I bring up these three points. Number one, when you take a policy loan, there’s no credit check, there’s no application, right? You’re not going to sign.

Steve (12:27):

I love that you’re mentioning this, Barry, because I’m always equating as an analogy, I draw an analogy to real estate because life insurance is an asset. Think of a life insurance cash value policy as an asset that you can take out a loan against, except that you have all these advantages that Barry’s beginning to touch on right now.

Barry Brooksby (12:47):

Yeah. No application. You’re not going to sign an inch-thick worth of paperwork. Then three, they’re not going to question you, “Hey Steve, what do you need the money for?” They don’t care because they’re using your cash value as collateral.

What you just mentioned, that number one point in that slide was even though you have a $50,000 loan, this compound growth curve, it never gets broken. You’re still earning interest in dividends on the full $100K.

You couldn’t say that about another type of investment. If you have a savings account or a brokerage account and you pull money out of that, you’re going to end up breaking that growth curve and then you have to start over again, but not in a permanent life insurance policy. The compound growth curve is still working for you even though you have a policy loan.

Steve (13:40):

Right. Amazing. For the analytical people, once again, we might have people thinking about direct and non-direct recognition and these things because different companies treat their dividend rates differently. It really comes out in the wash. Is that your experience, Barry, as far as whether they’re direct or non-direct?

Barry Brooksby (14:01):

That’s true. That’s true. It’s pennies on the dollar when it comes to difference. Making the decision on what company to go with shouldn’t be based on, are they direct or non-direct? What’s more important is cash value growth. Which company is going to give you the best cash value growth and meet your goals?

Steve (14:19):

There you go. One of our goals between Barry and myself is just to help bring the infinite banking concept to a modern understanding. Barry mentioned some of the misconceptions about paying back the loan, you’re paying back the insurance company, you can pay more interest toward it.

The other thing is understanding how dividends work and how they keep working even if you’ve taken money out against the policy.

The other thing I think is really cool, Barry, is in today’s climate, if you’re trying to get a real estate loan, they’re going to look at your income. If you have a business, they’re going to pick apart your business. Basically, none of that is happening with this kind of loan. Correct?

Barry Brooksby (14:55):

That’s right.

Steve (14:56):

You want a loan, and they’ll just issue it to you.

Barry Brooksby (14:59):

Yeah, you request it. Some companies have an app. You can do it right on your phone. Some, you log into your account. Others, you call their 800 numbers. Some, you can do all three, but what’s great is when you request the loan, they usually have the check to you or a direct deposit in your bank account within three to seven business days.

Steve (15:18):

Wow. That’s just liquid. That’s liquid. The other thing I love, on the bottom of this little list, you guys can see, unlike traditional retirement savings plans, there aren’t any requirements for when you have to repay it. If you’re going to treat it like a business and you’re going to run it the way you would any other loan, you definitely want to repay it in a structured way and maybe even with additional interest, but you’re not having to do it according to someone else’s list of requirements.

Barry Brooksby (15:46):

That’s right. Since we’re talking qualified plans on that bottom line, there’s no pre-59-and-a-half 10% penalty here. You can access cash in the very first year through a policy loan and you don’t have to worry about paying a penalty.

Steve (16:04):

We already touched on the interest rate, too. Very low interest rates on these. The idea is you’re probably not going to be paying anything for the loan and I’m not claiming that, but that can be how it works if the dividend rates are keeping pace with the interest and these things.

Barry Brooksby (16:17):

Yeah, correct. In another webinar that we’ve done, which is Whole Life Insurance: Becoming Your Own Banker, I go through a policy loan specifically and show that if you are paying it back and your cash value’s working for you the same time, that at the end of that loan period, you actually come out ahead because of the compounding, so it’s pretty remarkable. At face value, it might seem like a wash, but if you follow the way that I teach it, you’ll come out ahead.

Steve (16:47):

It compounds, I think is part of it, right?

Barry Brooksby (16:49):

That’s right.

Steve (16:50):

The cons, of course, you do owe the loan and it needs to be paid back. It can count against your total death benefit. It depends, right? Because you could have a design, Barry, where maybe someone starts taking out a regular policy loan for retirement purposes and you’re spending down the cash or maybe the death benefit, so there could be strategies where you don’t mind that you’re taking money out and you’re not as worried about repaying them. It depends on how you want to look at it, how your legacy planning is working.

Barry Brooksby (17:20):

That’s right, yep. What I want to address here, this is a general rule, but we want to look at everyone individually. The general rule is, while you’re working and while you have income, pay the loans back, be an honest banker throughout your life, but then when you hit retirement, now you have this large pool of money that’s a tax-free bucket of money for you that can be tax-free income in retirement. Well, at that point, you don’t pay the loans back. That’s usually my suggestion.

Barry Brooksby (17:54):

You’ve stopped paying premiums into the policy once you’re done working and you’re retired. You’re now taking supplemental tax-free retirement income from the policy. You don’t pay the loans back. Those loans and any outstanding interest would simply be deducted from your death benefit.

What’s so neat, these policies that I design have a growing death benefit that you don’t pay for out of pocket. By the time you get to 65 or whenever you retire, the death benefit is much larger than what you initially paid for. Those outstanding loans and interest, yes, come off the death benefit, but more than likely, your beneficiaries are still going to get some tax-free death benefit, too.

Steve (18:41):

Awesome. We did. You reminded me, Barry. We had another question come in last week from somebody at Insurance and Estates. What happens to the cash value upon death? I always talk to people about, the cash value is like the equity in the house, if you’re using a real estate analogy, and the house is the death benefit.

They do interplay with one another, and it’s important for people to be aware of and not get confused by it and also, not think that it’s some kind of a detriment because it’s really just a matter of whether you want to take those lifetime benefits or whether you want to reserve more for the death benefit.

Barry Brooksby (19:17):

That’s right. What we’re really addressing here, Steve, are using the policy while you’re alive. These are living benefits. You don’t have to die in order to get a benefit from the policy. You can use your policy today throughout your life.

Steve (19:33):

There you go. What’s cool, guys, too, and this is outside of our scope, but there’s all kinds of other living benefits that, you have long-term care and these things that you can all take advantage of in these policies. They’re really powerful on many levels.

Steve (19:47):

These are just some ideas. You can use your policy loans for anything. Barry touched on the big one, retirement income, and we talk about life insurance retirement plan. You’ve got webinars about what we call a LIRP and we’ve also got articles at Insurance and Estates, so you guys definitely, if you’re at that age or are wanting to plan for retirement, these are very powerful tools and policy loans are part of this.

A lot of people coach people on buying vehicles with the policy loans. Buying other assets are huge. I think planning for college can be huge and especially things like investing in your business can be very huge, using policy loans as a business owner to have a ready supply of capital for improvements or for emergency fund or whatever it is. Any thoughts on ideal uses other than those high points, Barry?

Barry Brooksby (20:38):

Yeah, my two favorite here, investing in your own business that you have this policy as your own bank and as you continue that cycle, making money, investing that money into high cash value whole life and then pulling it out to reinvest back into your business, that cycle, Steve, will create more wealth for the business and more wealth for the business owner.

Barry Brooksby (21:01):

Then secondly, retirement income. I talk to so many people, hundreds and hundreds of people every year throughout the country that are investing in tax-deferred retirement plans. You would be surprised at what they say, which is, wow, when I get to retirement, 100% of the income I take from those plans is taxable, and so I’m helping people build tax-free buckets of money.

This is, in my opinion, the most powerful tax-free strategy out there for tax-free retirement income. Don’t be in a position where you get to retirement and find you don’t have a single tax-free bucket of money. You’re going to regret it, because who knows what taxes will be in the future, 10, 20, 30 years from now. Chances are, taxes will be higher than they are today and you may not have all the write-offs 30 years from now that you have today as well.

Steve (21:58):

I love this topic today. This is one of my favorites, I think, that we’ve done, Barry. Reason being is it interplays into so many topics, investing in your business. I just want to point out, this goes right to your balance sheet. When you’re building a business and you’re trying to establish equity and credit for your business, it’s such a powerful tool to do this planning and have this account growing for your business so you don’t have to try to go for a bank and be hand-to-mouth and all these things. Exciting stuff.

Steve (22:26):

Policy loan tax advantages. This is the bonus round, bonus section. We’ve already touched on it quite a bit. However, I think for my part, I just want to point out that if you take out a policy loan, people aren’t always aware that that’s not taxable. I’ve actually had other professionals try to suggest that policy loans are sometimes taxable. Have you ever had that happen, Barry? What’s your thought on that?

Barry Brooksby (22:49):

I’ve never had it happen. What’s interesting is, I actually train thousands of CPAs across the country in infinite banking. They come to me and learn about infinite banking and, one, they’re always surprised that it’s so good, but I get that question often. Are you sure this is tax-free? I want to clarify, yes, it’s tax free if you meet two criteria primarily.

Number one, you can’t MEC the contract, right? You have to follow the MEC guideline, fund a policy for at least seven years. Don’t cross the MEC limit with over-funding the cash value, but I take care of that for you.

Barry Brooksby (23:29):

Then two, you do want to keep the policy in force until you pass away, but Steve, that doesn’t mean that you have to pay the premium your whole life. It’s called whole life, but it doesn’t mean you pay the premium your whole life.

I’m usually recommending people stop after 10, 15, 20 years or at age 65, somewhere when they retire, but you still keep the policy in force until you die.

That way, all the cash value growth is tax-free. The death benefit’s going to pass tax-free to your heirs, so these tax advantages are huge because, again, we don’t know what future tax rates will be 10, 20, 30 years from now. Create tax-free buckets of money using this strategy.

Steve (24:15):

Yep. Powerful. That’s why we mentioned the MEC in this slide. You can see, 59-and-a-half, in case people have questions about that.

Barry Brooksby (24:22):

Well, we’ll back up. 59-and-a-half, this has specifically to do with a qualified plan that if you have a government qualified plan, similar to a 401(k), an IRA, a 403B, a 457, right?

Any of those qualified plans where the government says, “We’re not going to force you to pay the tax today, but you will have to pay it in the future.” A lot of people think, “Oh, I just got a tax savings.” No, it’s a tax deferral.

In qualified plans, you’re kicking the tax can down the road. You’re not really saving money. It’s just that you’re not paying the tax right now. In those types of accounts, Steve, if you try taking money out before 59-and-a-half, that’s when you will be subject to the 10% penalty plus the tax.

Steve (25:12):

I want people to understand, the MEC is if it’s not treated as a life insurance policy. If the policy MECs, and Barry has mentioned that he takes care of that and helps make sure that it doesn’t, if you’re wanting to put any extra cash into the policy.

The initial design is designed not to MEC the policy, even if you’re trying to maximize the cash. Then, of course, you monitor it, and Barry’s talking about helping you guys do that. There’s that. The 59-and-a-half is just saying that if you have a qualified plan of some other kind, that you have these penalties, and you have this taxable issue with the deferred taxes.

Barry Brooksby (25:50):

Having the whole life insurance policy, this permanent insurance in play is going to avoid you having to pay any penalty if you do take money out before 59-and-a-half.

Steve (26:03):

You’ve got the extra liquidity there. That’s what, Barry, you’re talking about when it comes to having a tax-free savings bucket. It’s really critical to the whole idea of doing infinite banking and all these kind of things. There you go.

If you have more questions, there’s a lot of other webinars. If you decide you’re at the point where you want to see how a policy design, whether it be for retirement planning or business planning, real estate investing or just legacy planning with your loved ones, if you want to see how it would work for you individually, there’s a link below. It’s just a short questionnaire and you can get right on Barry’s calendar to schedule the one-on-one and go through the numbers and be walked through personally how this can work for you.

Steve (26:52):

If you’re still in an information-gathering mode, there’s other videos linked and on other topics. If you go on InsuranceandEstates.com webinars, you can see all the webinars, infinite banking, we have a Self-Banking Blueprint ebook, and a lot of other resources available.

Barry and I are going to be, in the near future, bringing a book to market to really dive into these concepts more deeply. We’re here to help you and we’re excited about this and other topics, to be able to offer them and give you the information you need to get empowered and get this strategy going for you and your loved ones. Barry, anything to add?

Barry Brooksby (27:28):

Policy loans and whole life insurance, again, one of the most powerful financial tools out there. I would encourage you, click the link below to learn more. It’s always best to see your own numbers. I put those together for you. We want to accomplish your goals in the most efficient way possible. Click the link below to learn more.

Steve (27:47):

Thanks again for joining us. Look forward to connecting.

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