Refinancing Life Insurance Loan

Speaker 1 (00:08):

I am Bill Bosman. I’m here to talk about life insurance policy loans. Recently, I’ve had a disproportionate number of cases hit my desk with significant policy loans. Some policy owners had no idea there were loans on their contract. Others were aware but did not understand the interest rate or how it affected the policy, while others simply didn’t know what to do about it. Some contracts actually did have the premiums paid from internal policy values, but many of these contracts were set up on something called an A P L option. A P L stands for automatic premium loan, which means that the premiums for the policy were actually borrowed from the insurance company. A problem with this is that many policy owners never understood how this worked, and the interest rates for these loans are very high, often 8%. Compounding those loans at 8% while adding the annual premiums over time has resulted in dramatic loans, which are now threatening many of these contracts. 

Speaker 1 (01:15):

When we look down the road and do some modeling, we’ll see where these numbers are gonna end up, and it’s not pretty. Many of these contracts will collapse with a loss of death benefit and the cash value and result in devastating income tax consequences, but it doesn’t have to be this way. There are a number of management options within the policy we can take advantage of, such as changing dividend options and other loan management strategies. Regardless of what we do, we’re still dealing with a loan with a very high borrowing rate, as I mentioned, often as high as 8% short of paying off the loans with cash out of pocket, which is often very difficult given the size of these loans, we have to find something else. If you discovered a client or friend had an 8% home mortgage, what would you tell ’em after recovering from your initial shock? 

Speaker 1 (02:08):

You’d probably tell ’em to get their head out of the sand and refer ’em to a bank that could cut their interest by half or more. Why not? The same with a life insurance policy loan regarding debt? When’s the last time you saw 8% being better than 3%? Many policy owners don’t even think this would be possible. They see the policy loan as completely intertwined with the policy, but they don’t understand it is simply a loan from the insurance company that has stepped in in place of the bank. If you had a pot of money, you could certainly pay off the loan. Right? There is not much different With an external policy loan refi the cash value of the contract collateralize the loan, and now you have an unencumbered policy moving forward on a better performing basis, saving tens or hundreds of thousands of dollars a year, a restored death benefit, and the avoidance of catastrophic tax consequences. What’s not to love? In all seriousness, this is the time for us to perform independent and objective modeling. The numbers will tell the story and point us to action to better understand how this will affect you and benefit your policy. Don’t hesitate to contact us for a preliminary analysis.

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