How does this Concept work?
Using the cash value in your policy rather than a more traditional method of financing could offer a better way to increase your net worth because you can access this money—which has been growing tax deferred—tax-free and without penalties. By repaying the policy loans at a rate that exceeds the rate charged by the insurance company, the policy’s cash values and death benefits will increase.
What are the benefits?
As a policyholder, you enjoy several benefits. When you borrow against your policy, you aren’t actually borrowing from your policy values, but are borrowing from the insurance company, with a lien against your policy. Therefore, you aren’t subject to a credit check; you usually get the money in a few days; you have no fixed repayment schedule; and money obtained through policy loans usually will not trigger a taxable event.*
Any amount that isn’t repaid will be deducted from the policy’s cash surrender value and outstanding loans If the policyholder dies before the loan is paid back, the outstanding amount is deducted from the death benefit.
Why should I consider using Insurance?
With the Insurance Benefit, you can avoid paying interest on loan payments to traditional finance companies and, instead, make such payments into your own life policy.
Using Index Universal Life (IUL) insurance as a method to "become your own bank" is a strategy sometimes touted by financial professionals. IUL is a type of permanent life insurance that offers a death benefit and a cash value component. Unlike whole life insurance, the cash value of an IUL is linked to the performance of an index (often the S&P 500 or another major index), though there's typically a guaranteed minimum interest rate.
Some
Advantages
Downside Protection:
The floor ensures that even during a bad market year, your cash value won't decrease due to market losses.
Tax-Free Loans:
You can access your cash value through tax-free policy loans.
Potential for Higher Returns:
Compared to traditional universal life or whole life insurance, IULs offer the potential for higher returns because they're linked to market indexes.
Some
Disadvantages:
Caps on Returns:
The cap limits the maximum return you can achieve in a good market year.
Complexity:
IULs are complex products with many moving parts like caps, floors, participation rates, and cost of insurance.
Costs:
There is an insurance component expense
Things to consider:
Understand the Product:
Due to its complexity, ensure you fully understand the product, its fees, and potential returns.
Not a True Bank:
The phrase "become your own bank" is a metaphor. You're not creating a bank; you're using the cash value of a life insurance policy as a source of funds.
Consult Professionals:
Always consult with a knowledgeable professional and possibly a tax professional before making decisions.
How IUL's work
Purchase an IUL Policy:
Once you've determined that an IUL is right for your financial situation and goals, you'll start by purchasing a policy and paying regular premiums.
Cash Value Accumulation:
A portion of your premium goes towards the insurance cost, while the rest is invested in a cash value account. This cash value is credited with interest based on the performance of an external index.
Caps and Floors:
The unique feature of IUL policies is that they offer a floor, which is a guaranteed minimum interest rate (often 0% or 1%), meaning you won't lose principal even if the market performs poorly. However, there's also a cap on returns, so if the index gains 20% and your cap is 10%, you'll only get credited with 10%.
Tax-Deferred Growth:
The cash value inside the IUL grows tax-deferred, so you won't pay taxes on interest earned as long as it remains in the policy.
Borrowing from Your Policy:
Once you've built up a sizable cash value, you can borrow against it. These policy loans are typically tax-free, as long as the policy isn't surrendered or lapses with an outstanding loan.
Repaying the Loan:
Unlike traditional loans, you're not obligated to repay policy loans, but interest will accumulate. Any outstanding loan amounts will reduce the death benefit and the available cash surrender value.
Flexible Premiums:
IULs offer flexibility in premium payments. As long as there's enough cash value to cover the costs of the policy, you can adjust the premium amounts.