Why would I use a life insurance policy loan when I could use cash?
1. A cash withdraw (surrender) breaks the compound growth curve.
- You lose the opportunity to continue earning interest/dividends on the cash value surrendered.
- You have to replenish what you took at interest to get back on track.
2. The death benefit associated with the cash value surrendered goes away.
- Cash surrenders reduce the death benefit.
- To break even, you have to replenish what you surrendered, plus interest, plus whatever is needed to secure an equal amount of death benefit.
- You replenish the cash value by purchasing paid-up additions (PUAs), small chunks of paid-up life insurance.
- PUAs are purchased at your current age, unlike the surrendered portion, which was less expensive as it was purchased at an earlier age.
3. With policy loans, the cash value and death benefit remain untouched and continue to grow.
- The loan has an interest cost, but your capital and associated death benefit remain intact and growing.
- It simplifies replenishment as you only need to worry about loan repayment to make yourself “whole.”
Pretend the policy is real estate and assume you could withdraw equity. Why would you take a home equity loan instead of just drawing some of the equity and surrendering a portion of the property value? It seems ridiculous when I put it that way, but it’s essentially the same thing.
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