Life Insurance Blog

cash value is liquid
July 16th, 2009
in Life Insurance

The cash value of life insurance is liquid. You can tap into it for a preferred policy loan whenever you need it for buying things, investing, etc. This of course is all based upon you having money in your cash value to draw from. The cash value must be built over a period of time, like any bank requires deposits, before money is available. Typically 90% of the cash value is available to the policyholder for loan.

The beautiful thing about the cash value is that it grows tax deferred and can be accessed tax-free if done correctly. Taking a loan from the cash value is similar to taking a home equity loan. The bank charges a loan interest rate when you draw on your equity, just like the insurance company. For example, the insurance company may charge 7% on loans to the cash value. Let’s just say you take out a loan from your policy for $30,000 to buy a new car. You buy the car in cash and at a 7% interest rate you will owe the insurance company $2100 annually. The key is to pay it back as the money paid back is mostly going back to the principal of your cash value. I would suggest amortizing the loan over a typical car loan period, like 4 years. Calculate the payments, and start making them back to your policy. I would suggest that you choose an interest rate above the 7% charged by the insurance company as this will help to maximize your available funds. Maybe you charge 12% and the additional 5% goes to your cash value and you make the spread. At the end of 4 years the full amount has been paid back to your cash value and then some.

If you borrow from a lending institution instead, it is a much different picture. At the end of four years, all the principle and interest has been given to the finance company and you own a vehicle that has lost dramatic value. The liquidity of the cash value is a wonderful thing that you should use to buy what you need as you go.

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