One of the rarely discussed aspects of dividend paying whole life insurance or universal life is how to use the cash value in the most effective way. Many times even agents don’t have a good answer for this question.

When funding and using the cash value it is important to understand some basic principles. If you use the cash value properly, it will allow you to re-capture much of the finance charges that you would be otherwise paying to a financial institution. Is there a way to finance these things yourself and reap some of the rewards of a finance company? Absolutely, through your cash value.

The key to being able to finance purchases through your cash value is putting enough money into your life insurance, so that there is enough in there for you to buy what you want. Like any bank, deposits must be made in order to be able to make loans to the customers. Once enough money is available in the cash value, you can pull the money out and buy your next car. When you buy the car, you must pay yourself back and with an honest interest rate. When I say honest interest rate, it means that you must pay yourself back at the interest rate that will help your financing center recoup all of the money and grow.

The life insurance company charges anywhere from 5-8% for a loan on your policy to handle all of the administrative aspects. Let’s say that your dream car is $40,000 and the insurance company is charging 6% for you to loan the money out. In turn, you can take the $40,000 out of the cash value and buy the car, and then amortize it out like the dealership would over 4 years. Since the loan costs 6%, you should pay your policy back at a rate above that like 10%. This way you will pay yourself back all of the principle over the four years, but also earn the spread on the financing charge. Another great aspect, is that if the money is in your policy, you don’t have to qualify for the loan. You just simply ask the administrative people from the insurance company to send you a check.

At the end of the 4 years, all of the money has been returned to you and your policy has grown on top of that. At retirement the money can be used for retirement income tax free if done correctly after using it all along the way for buying all the necessities of life.