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5 Reasons Policy Loans are Better than Traditional Financing

When it comes to how we pay for major purchases, there are generally two main camps. The “normal” people, if I can call them that, just take a loan from the bank, or the car dealership, or put it on the credit card. Others would take the road less traveled, save up and pay cash. We'll talk about paying cash in another post. But what if there was a third option? The ability to borrow against your policy is a major benefit of owning dividend-paying whole life insurance. In the next few paragraphs, I’d like to lay out five reasons why taking a policy loan is superior to traditional financing.

1) There is no set repayment schedule.

Since you are using the cash value in your policy as collateral, the insurance company sees this as a zero risk loan for them. The reason? They are both the party loaning the money AND guaranteeing the collateral value. Think about that for a second. If you get a HELOC (Home Equity Line of Credit) from the bank, the banker has no way of making sure the value of your home doesn’t decrease. If you take a loan based on your credit score, well, past performance is no indication of future results…at least from the lender’s perspective. They are expecting to be repaid, but the greater the perceived risk, the more interest they charge for their trouble.

With a policy loan, however, the insurance company knows that you’re good for it. Why? Because it’s all within the same system. Even if you never pay the loan back, they know they can simply deduct the amount from the death benefit that they will owe to your family eventually. I don’t recommend that. Just sayin’.

For this reason, they allow you to decide how and when to repay the loan. You can set up monthly payments, pay for one year and skip the next, let it ride and just pay the interest…it’s literally up to you.

2) There is no amortization on the loan.

Many large ticket items, including mortgages and many car loans, have the interest built into the payment schedule. And you can bet that you’re going to be paying the bulk of it up front. Why is that? That’s so that even if you pay off your loan ahead of time, the lender still gets his interest. You also need to check the fine print to see if you’re even allowed to pay it off ahead of schedule!

Policy loans are not structured this way. Every payment you make goes straight to the principal of the loan, and the interest isn’t applied to your loan until your policy anniversary date. That means that if you pay a loan off in half the time, you’ll pay half the interest.

3) Interest is only applied annually, instead of monthly as with most traditional financing.

In most cases, interest on 3rd party debt is applied monthly. That means that the interest is applied and compounds 12 times a year. Policy loans charge simple interest that is applied once annually. Now, if you don’t pay at least the interest it will carry over into the next year, but at least it’s not compounding 12 times in that same time frame.

Nelson Nash, the author of Becoming Your Own Banker, used to say all the time that it’s not the rate that’s important, but the volume of interest. Because of this, a simple side by side comparison of interest rates is not going to tell you which one is a better deal. The volume of interest you pay on a policy loan is often less than you will pay from a traditional loan, even if it is not a lower rate.

4) There is no approval process.

This point all comes down to who is in control. You are most likely familiar with the paperwork, questions, credit check, and overall hassle of securing traditional financing. With a policy loan, the only questions you’ll be asked are regarding your account information and where you’d like the money sent. The money is generally in your account within a week or so.

5) Your money continues to earn interest and dividends, even on the loaned amount.

This last point is what sets IBC apart from all other strategies. It’s also where a lot of click-bait on the Internet has caused confusion. When you take a policy loan, you are not borrowing from yourself. You’re borrowing from the general fund of the insurance company. However, you are borrowing from your own system. The interest you pay contributes to the profitability of the insurance company, of which you are part owner. Profitability leads to dividends, which are paid back to you.

Since the money in your account is used as collateral, it just keeps growing uninterrupted. You can borrow as much as possible against your account and continue to receive interest and dividends the same as if you never borrowed anything at all.

For the person who is willing to think differently about their finances, leveraging the loan provision inside a dividend-paying whole life insurance policy makes all kinds of sense. It is a central component of practicing the Infinite Banking Concept.

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