Why a Policy Loan is Superior to a Home Equity Loan

Why A Policy Loan is Superior to A Home Equity Loan

Your daughter is getting married, and her wedding will require a good chunk of cash to pay for that you might not have on hand. If you have a mortgage and have equity in your home, you could take out a home equity loan with your house serving as the collateral. However, when it comes to financing big-ticket expenses throughout life, there is a better option you might not even know about to help pay for that wedding and other things.

You can pay premiums into a dividend-paying whole life policy that protects your loved ones and estate upon your death but features living benefits. What are these living benefits? Dividend-paying whole life insurance is a unique asset because it features a cash value. This cash value serves as a savings component that provides you a place to warehouse your money and build long-term, sustainable, tax-sheltered equity through predictable and secure contractual, compounded growth and potential dividends.

An analogy to explain how the concept of the cash value feature inside a dividend-paying whole life insurance policy works is owning a home and paying a mortgage. The longer you make mortgage payments, the more principal you pay off and the more equity you build up in your home as an asset that you can borrow against. It works similarly with a dividend-paying whole life insurance policy. The more premiums you pay into your policy, the more equity you build up in your cash value.

You can use the equity in your cash value to finance big-ticket life expenses, such as a wedding, you might not have extra cash on hand to pay for by taking out a policy loan. Another option is to use the cash value as collateral for taking out loan through a third-party lender (known as collateral lending).

A policy loan is a loan from a life insurance company taken out by the policy holder on a permanent life insurance policy. When you take out a policy loan, you use the cash value and death benefit in your dividend-paying whole life insurance policy as collateral for the loan. If you don’t repay the policy loan back to the life insurance company, the amount owing, plus any interest, is deducted from your death benefit claim upon payout to your beneficiary.

While a home equity loan is comparable to taking out a policy loan from a dividend-paying whole life insurance policy, some key differences make a policy loan superior to a home equity loan. Think in terms of flexibility, liquidity, access, and control.

Difference #1:

Since a dividend-paying whole life insurance policy is an asset, you own and control, the mutual life insurance company is contractually obligated to give a policy loan at a pre-determined interest rate. With a dividend-paying whole life insurance policy, you will never hit a brick wall with getting a policy loan when you need it. However, the bank is not contractually obligated to give you a home equity loan just because you have equity built up in your home and ask for a loan.

Difference #2:

When you take out a policy loan, you don’t have to offer any explanation to the life insurance company for your request. When you go to the bank to get a home equity loan, you must argue your case—perhaps even justify your reason for wanting the loan.

Difference #3

You are not required to show proof of income or undergo a credit check to get a policy loan. When you ask the bank for a home equity loan, your credit score is considered and must be in good standing. You also must show proof of income.

Difference #4

With a policy loan, you have complete control over the repayment terms. The life insurance company does not ask you when you plan to back the policy loan. The bank sets the repayment terms when you take out a home equity loan. You have no control.

Difference #5

If you hit financial difficulty along the way, you can reduce, skip, or stop payments on your policy loan. You don’t have to worry about collection calls or a black mark on your credit report. There is no legal obligation to pay back your policy loan ore make repayments if you are in a position where you can’t. However, if you miss payments on a home equity loan, it does impact your credit score. If you face financial difficulty and miss several payments, the bank can even put your home into foreclosure and use the money to pay themselves back the loan and give you the balance.

Using the cash value in a dividend-paying whole life insurance policy as collateral to finance big-ticket expenses throughout your lifetime is having complete control and access to funds when you need them. When you use the equity in your home as collateral for a home equity loan, you give over your control and leave your fate in the hands of the bank.