7 Common Insurance Lending Myths
Borrowing money isn’t for everyone and all lending strategies come with an added layer of risk that you need to be aware of and comfortable with. There are a lot of myths and misconceptions about insurance lending, here are 7 of the more common ones that we hope to clear up for you.
1. IF YOU’RE RICH, YOU DON’T NEED TO BORROW MONEY
While that’s often true, there is a strategic benefit to borrowing against an insurance policy. If the investment opportunity outweighs the interest rate costs and tax implications, it might make sense to explore a policy loan. This can be a quick and easy way to access funds.
2. IT’S EXPENSIVE
Policy loans can have much lower interest rates, so even after the initial set-up costs, the rates can make these loans very attractive.
3. YOU ARE TAKING ON MORE DEBT
Think of these loans as a line of credit, if you are not using it, it doesn’t cost you anything in interest. Using debt, especially in a low interest rate environment, can be a smart way to help maximize available capital. Clients are choosing to, not having to, take advantage of insurance lending.
4. IT’S RISKY
Actually, insurance lending is a well-established practice. The loans are fully secured against the cash value of the policy without affecting the cash value growth or death benefit.
5. YOU HAVE TO GO TO THE INSURANCE COMPANY FOR A LOAN
This may be true for some policies, yes. However, financing organizations have made arrangements with insurance companies allowing you to use the cash surrender value as security for a line of credit.
6. IT ONLY BENEFITS WEALTHY PEOPLE
Not valid as some institutions offer loans against policies with as little as $33,000 cash value.
7. YOU DON’T HAVE TO QUALIFY TO GET THE LOAN
Policy loans are not distributed indiscriminately. While you are essentially borrowing money from yourself, most insurance companies and financial institutions still want to know that you have a good history of repaying loans.
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As with any kind of financial loan or investment decision, it’s important to get professional advice on the best ways to access additional funds to minimize your risk and tax situation.
In the right situation, insurance lending can be an effective way to take advantage of investment opportunities and initiatives and increase your overall financial position.