facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause
How Do I Access the Money in My Policy? Thumbnail

How Do I Access the Money in My Policy?

Insights

You have finally taken action and are the proud owner of a properly structured, dividend paying whole life insurance contract – congrats!

Now you need to figure out how to use the money in your policy.

There are three ways to use the funds in your policy, which include:

  • Sad way
  • Dumb way
  • Smart way

The sad way.

The sad way of accessing capital in the policy is when the insured dies.

When the insured passes away, the life insurance company will send the value of the death benefit (minus any outstanding loans) to the beneficiary. The death benefit comes income-tax-free to the recipient. This makes life insurance one of the most efficient ways to pass on wealth.

After the insured passes and the death benefit is paid, the life insurance contract on the insured is complete.

The dumb way.

Now for the "dumb” way. One of the worst ways to access your money is through policy withdrawals.

The amount you can withdraw from a policy is the total value of the cash surrender value of the policy. The main problem with withdrawals is that you can never replace the money that you withdrew in that specific contract. Withdrawals will interrupt the compounding interest in your contract (creating lost opportunity cost), and your death benefit will be permanently reduced, as well.

You also have to pay taxes on any gains in your policy if you withdraw the money. For example:

If the cash value of your policy is $150,000, and you have paid in $100,000, you would have to pay taxes on $50,000 if you withdraw the entire cash surrender value ($50,000 was your gain).

The one time it might make sense to use withdrawals is later in life during retirement, or when the policy is used for passive income.

The smart way.

The “smart,” and most efficient, way to gain access to your money is through policy loans.

When you use policy loans, your money stays inside the policy where it compounds without interruption. Meanwhile, the insurance company lends you their money, and charges interest.

You are now using other people’s money (OPM) to finance your needs, which allows your own money to compound without interruption for the life of the contract.

It is CRITICAL for you to understand opportunity cost at this point. Remember this quote from R. Nelson Nash:

“You finance everything you buy. You either pay interest to someone else or you give up interest you could have earned elsewhere. There are no exceptions.”

Below we have made a chart to depict the “smart” way of using policy loans, and why this is the most efficient way to deploy capital.

Compound vs. Amortized Interest

$50,000.00

Compound Interest Earning 4%

Amortized Interest at 5%

Year

Interest Earned

End of year Balance

Interest Charged

End of Year Balance

1

$2,000.00

$52,000.00

$2,410.19

$46,046.23

2

$2,080.00

$54,080.00

$2,207.92

$41,890.19

3

$2,163.20

$56,243.20

$1,995.30

$37,521.53

4

$2,249.73

$58,492.93

$1,771.79

$32,929.36

5

$2,339.72

$60,832.65

$1,536.85

$28,102.25

6

$2,433.30

$63,265.95

$1,289.88

$23,028.17

7

$2,530.64

$65,796.59

$1,030.29

$17,694.50

8

$2,631.86

$68,428.45

$757.39

$12,087.93

9

$2,737.14

$71,165.59

$470.55

$6,194.52

10

$2,846.62

$74,012.21

$169.05

$0.00

Totals

$24,012.21

$13,639.21


This table demonstrates how using a policy loan is the ideal way to access your funds, rather than paying cash.

You have $50,000 of cash value in your policy and have quit funding it for the sake of simplicity. You decide to take a policy loan for the full $50,000 at 5% interest to make a down payment on a rental property, and will pay yourself back over a 10-year period.

Over that 10-year period you pay $13,639.21 to the insurance company in the form of interest. Since your money stayed in the policy and compounded without interruption at 4%, the cash value grew from $50,000 to $74,012.21, which is a $24,012.21 gain.

If you take that $24,012.21 gain and deduct the interest you had to pay to the insurance company ($24,012.21-$13,639.21), you actually had a net gain of $10,373.00. All $24,012.21 is yours though, you recaptured the lost opportunity cost (in this case $13,639.21)! This is the power of properly structured, dividend paying whole life insurance!

For simplicity we used structured payments back to the insurance company for the loan. However, these terms are controlled by you, and as long as you have enough CV to cover the interest accruing on your loan, you decide when and how much to pay back on your loan, or if you pay it back at all. The banker is you, and there is no outside institution calling you for a payment.

Now that’s control!