Introduction Of Cash Value Collateral Loans – Policy Loan Insurance
Cash Value Collateral Loans – Policy Loan Insurance. What you paid in just call it the net growth rate for that particular year so from year three to year four it grew by just under two and a half per cent it’s a non-mec we can count that as a tax-free growth rate as well but that’s the yearly growth rate if we look at this.
Average internal rate of return
The average internal rate of return is point zero one per cent why it’s point zero one per cent is over four years I’ve paid in four hundred thousand dollars and I have four hundred thousand one hundred and twenty-six dollars so that one hundred twenty-six dollars is where that point zero one per cent is being generated from so the average internal rate of return accounts for the early years.
What’s my average growth rate over a certain period by year 10, for example, I’ve paid in a total of 1 million dollars I have 1.18 million dollars 1 million 181 thousand dollars so my average IRR of three per cent of my annualized IRR is 4.08 so I spent a decent amount of time on the internal rate to return there the reason why is because people are often asking about that so I want to make sure that
The cash value is the equity
If that’s been on your mind I hit on it but the reason why is when we look at this at a model with a direct policy loan here we go so here we’re taking a 300 000 policy loan out in year five what’s the impact of that three hundred thousand dollar policy loan well the cash value is the equity that determines how much you can borrow think of it.
That way and your death benefit will always be collateralized dollar for dollar you’ll notice a 300k reduction in death benefit in year five because I pulled out 300 grand now here’s what I want to touch on interest rate in this particular example is six per cent cost to borrow goes where to the insurance company this is a fixed loan interest rate so.
There’s the cost to borrow six per cent there’s the loan interest there’s the interest on paying out of pocket and then we apply thirty thousand dollars per year toward the principal balance but six per cent cost to borrow that’s what it is it’s fixed so it’ll never change what’s my net internal rate of return if I look at the.
Attractive rate in the policy on my entire cash value
Annualized internal rate of return tops out at five per cent and this is based on the company’s present dividend interest rate of six per cent you may know who this company is now but that’s okay so annualized IRR five per cent cost to borrow six per cent if I look at my average internal rate of return do I ever hit six per cent now I top out right around four point six per cent.
So do I have a positive spread or a negative spread it’s negative when I look at it now again some people are okay with this because they view it hey I’m still earning an attractive rate in the policy on my entire cash value I’m only paying the six per cent on the amount I take a loan out so therefore I’m technically still compounding a greater dollar amount than. You Can Also Read All About Guardian In A Insurance Guide 2022.
What I’m paying in loan interest but some look at it and say hey I’ve got a higher cost to borrow like it’s not for me what’s that what’s an alternative otherwise I’m not going to do it so let’s look and look at an alternative here same policy here we’ve got the funding for 10 years on the left and then we’ve got our cash value collateral loan workbook so.
The total cash value
What I want to do first here is just plug in the loan to value because it’s typically 95 per cent so what we’ve got here should be pretty easy to follow is just 95 per cent of whatever the total cash value is so, for example, year ten you’ve got one million one hundred eighty-one thousand dollars in cash value ninety-five per cent of that is the one million one hundred twenty-two thousand dollars.
So as we look at this guy make this a click bigger there we go if you want to now leverage the policy what did we take out in the last model it was year five a three hundred thousand dollar loan so if we wanna do that let’s plug in a three hundred thousand dollar loan in year five and there we go so what this does we’ve got a cost to borrow over here three per cent this would go to the bank in this particular case.
So if I just pay interest only I have this nine thousand dollars annual interest expense however let’s take a look at this under our loan repayment to let’s assume the next year let’s assume one year actually we don’t make any principal payments and then begin to repay it at thirty thousand dollars per year toward the principal so with this model just how I’m building it out we’re paying more than thirty thousand net out of pocket.
The interest payment
Because we are covering the interest payment and then 30 000 on top of it the column on the far right net interest what this represents is your total interest payments I found a lot of people appreciate seeing this I do myself because sometimes it can be difficult to calculate when I’ve got all these numbers and columns if we just lay it out there it makes it easier so for example interest payment here.
The year I take that three hundred thousand dollar loan nine thousand dollars that go to the bank so we have the net interest payments over here of nine thousand dollars over one year that’s the total amount of interest I’ve paid to the bank now in the second year I make a thirty thousand dollar principal payment eighty-one hundred dollars in loan interest.
That eighty one hundred dollars is three per cent of the two seventy now we’ve got the net interest over here seventeen thousand one hundred that combines the total interest payments I’ve made over all years, in this case, the first and second year as we continue to pay back there we go I have paid a total of forty-nine thousand five hundred dollars in interest to the bank with real estate investors that.
Loan interest assuming the variable rate
We work with this is the kind of stuff we like to walk them through or go through this model I send this workbook we all do when I say we all do our agents we’ll send it if you’re working with us we’ll send it to you no problem but we like to see what will the actual cost be it’s a very simple workbook to use so if you have it you can easily just plug in numbers.
Just to get an estimate of what your costs will be it’s neat to see the stuff in advance rather than just hoping things will work out you know what I mean so here we go with the net cost to borrow three per cent this is good and then do the same thing over here what’s my annual IRR and my average IRR annually by year five based on the company’s present dividend rate and the design of this policy.
I’m earning more than what I’m paying in loan interest assuming the variable rate does not go up on the average IRR year five I’m at a one per cent net positive return so that’s a negative two per cent spread if I look at the average why I kind of when I look at the average I like to look at it and a lot of people do but the average IRR that’s one per cent on your total bucket of money the 500 515 000.
A cash value collateral loan
Where you’ve paid in 500 versus over here I’ve got the three per cent only on the 300 000 so it’s good to look at both hopefully this does provide some value as we continue to go through it when I look at the average IRR over here year 10 is where I exceed 3 per cent so again it’s good to look at both again I’m a fan of the annual because I get to see.
What am I paying in loan interest that particular year and what am I earning that particular year let’s look at one more example here of someone we work with that I like very much who is 52 years old female that’s using her policy for real estate she can elect to borrow directly against her policy at a 5 cost to borrow which isn’t bad that’s right around the average or a cash value collateral loan.
She was actually in a position where she started the policy it was a little bit different dollar amount than this but she started it and said hey I’ve got an opportunity I’d like to take out about a hundred thousand dollars we looked at a direct policy loan then also a cash value collateral loan so you was able to postpone the date of the transaction to take advantage of a cash value collateral loan just because after looking at the cost to borrow more comfort was there cheaper it’s like hey I’d much rather go this route so let’s plug in the numbers but I also want to mention here too and awareness is key here because if I take a loan in the first policy year.
