I plan to take a loan from my whole life insurance. If I have $100k in cash value, I remember I can borrow less than that. So, if I borrow $70k, will my cash value stay at $100k and keep earning interest?
I’m not very financially savvy, but I’ve heard about the infinite banking concept. My understanding is basic, and it feels almost too good to be true. What’s the usual catch?
Your question is about direct recognition vs. non-direct recognition, and it depends on the company. With direct recognition, they account for your loan when crediting the dividend, so you’ll earn less. With non-direct recognition, you earn the same amount as if you had no loan meaning the loan doesn’t affect the dividend calculation.
Berey is asking if dividends will continue to accumulate on the full $100k or just on the $30k left after withdrawing $70k.
There are two types of loans that permanent life insurance companies offer, and most whole life policies only offer one:
Direct Recognition Loan: In this type, your loan becomes an asset of the policy. Before taking the loan, you have $100k invested in the insurance company’s general fund. After taking a loan of $70k, you now have $30k still in the general fund and $70k invested as a loan to yourself. Both the $70k and $30k will still earn, but the $70k earns from the interest you pay on the loan.
Non-Direct Recognition Loan: In this type, your loan is considered a liability against the policy. Before taking the loan, you have $100k in the general fund. After taking the loan, the $100k is still in the general fund, acting as collateral for a $70k loan from the bank that the insurance company got for you. The full $100k earns interest, but the interest on the $70k is permanently lost.
It depends on your insurer, but yes, it can work like that. If you have $100k in cash value and take out a $70k policy loan, the cash value stays at $100k for calculating dividends. However, your net cash value (cash value minus the policy loan) would be $30k, and you’d have a $70k loan balance.
Why do you think this sounds too good to be true?
If I take a regular loan, I’ll pay interest. But if I put money into whole life for cash value, then take a loan from it, I’ll earn a bit on that cash value, which could help offset the interest on the policy loan, right?
Yes, the policy dividends should mostly offset the loan interest, making it similar to withdrawing from your bank savings. But with whole life from top mutual insurers, you could end up with more money over your lifetime (5%+ compounded long-term, based on corporate bonds, tax-free).
Also some companies may take many many years to build up enough cash value to take that much out
If you’re with a direct recognition company (like I am with Penn), you can open a cash value line of credit with a bank. I do this because direct recognition makes dealing with the insurance company less flexible compared to a bank.
If you have $100k in cash value and take out $70k, you’ll have $30k left. If you pay it back, your cash value will increase by that amount. If you don’t, the unpaid loan will be deducted from your death benefit.
I thought the cash value served only as collateral for the loan you take out. That’s how I understood the infinite banking system, so I might be mistaken.