Introduction Of Ceo Of Software Company How They Use Their Cash Value Insurance Policies
Ceo Of Software Company How They Use Their Cash Value Insurance Policies. Several different options with mass mutual guardian looked at the guarantees the product design by studying illustrations I had a ton of fun, to be frank, I always loved talking about this stuff but in this video, we’re going to look at leveraging the policy now.
Cash value collateral loans
When it comes to taking policy loans specifically this individual was interested in what well he wanted to leverage policy loans we talked about direct policy loans but then also cash value collateral loans which are much more attractive to him because I will see a lower cost to borrow that is what he is interested in and then number two he’s going to use these loans for his real estate business.
So when I take out a policy loan if on the paperwork I check off a box or the box that states that this loan is for business purposes not personal that generates a potential tax deduction it’s much easier to deduct the loan interest on a business loan with a bank compared to a direct policy loan if you’re taking loans from your life insurance policy.
If you’re borrowing against the policy direction the IRS generally does not allow loan interest to be deducted now you can do it I’ve seen CPAs do it that’s why I say you can as long as everything’s properly documented agreements are in place however it is something that the IRS, in my opinion, may look at more closely and just if I want to stay clear of them this does make life a bit easier concerning that deducting.
Leveraging a cash value collateral loan
The loan interest and getting a lower loan interest rate we can often find three per cent here so what we’re going to look at is a couple of different models with mass and guardian different models of max funding the policy and then leveraging a cash value collateral loan which we have a workbook um if you work with us reach out to us anytime we can provide this workbook to you.
If you’re working with us on a policy right now we can send it as well but he asked a good question which was when analyzing the policy, particularly the break-even point should we account for the loan interest because the loan interest the payments he makes he makes are technically out of pocket so he wants to look at his overall break even accounting for premium pua and loan interest payments and that’s.
Perfectly fine to look at in my opinion it’s really up to the individual yes you can argue hey if you’re deducting that you don’t want to look at the whole amount but it doesn’t matter what I think and what I mean when I say that is whatever you are looking at when studying the numbers yes there are certain things you could argue we should look at but whatever you’re looking at.
We’ve got here is a cash value collateral loan workbook
If you want to account for the loan interest and the break-even study let’s account for that I like that quite a bit so what we’ve got here is a cash value collateral loan workbook this example is the MassMutual 10 pay policy we had looked at before so the mass comparison from there’s the 10 pay product we’ll start with this guy so as we look at this.
What do we notice there’s the 250 for four years if I don’t touch it there’s my breakeven point between years four and five by year four they’ve paid in a total of one million dollars and they have just about one million dollars 996 thousand dollars in cash value why that four thousand dollars less does result in this average internal rate of return still being in the red in year four. You Can Also Read New 2022 Trending Deep Dive into Policy Loans.
Because I have less money than what I paid the annual IRR is positive 2.35 per cent and what that represents is years three to four I paid in 250 I got my 250 back plus another 2.35 on top of it so that’s the annual growth I saw in cash value so we did not include the average our internal rate of return of death on death benefit in this workbook.
What it is you assign your cash value
So when leveraging cash value collateral loans let’s take a look at this most lenders will offer 95 of whatever your cash value is that can be obtained through a cash value collateral loan a line of credit is what it is you assign your cash value as collateral to the lender they place a collateral assignment on it and then you have a line of credit with them.
Whenever you pay premiums or pump money into puas and increase that cash value you can apply for an increase in the line of credit some banks limit that to two increases per year some banks don’t depend on who you’re working with so what we ran here is 95 per cent of the cash value in a total line some banks offer a hundred but most cap it at 95 per cent so 95 per cent of 222 almost 223 thousand dollars is 211 000 so.
There’s his cash value 463
What that means is if this is the policy he goes with and in the first year he’s got just about 223 the maximum line of credit he can attain is just about two hundred thousand dollars as he pays in the next year there’s his cash value 463 there’s how much he can draw against his line if we look at year five where he’s positive here.
He’s got 1 million 37 000 maximum lines about 9.85 so let’s look at some scenarios here shall we let’s assume that we’ve got that five hundred thousand dollar loan coming out in year three so what this will always assume here is as follows there’s my loan balance annual interest due three per cent so we plug in the interest rate.
We can adjust that because these rates will likely adjust over time if interest rates go up some lenders offer a 2.75 rate if I’ve got a seven-figure balance of a million dollars or more in cash value most are right around three per cent some are three and a half but a three per cent there we go fifteen thousand dollar payment I will be required to make at least interest only payments each year with a cash value collateral loan.
Against the cash value
Whereas with a direct policy loan I would not be required to do so I’ve got a bit more control there I would have to pay the interest only if I drew everything against the cash value and I wasn’t paying a premium or anything like that, in this case, I have to so this assumes interest only payments to the far right what do I got here net interest.
I should have called that net out of pocket this will reflect the total interest payments I’ve paid cumulatively so next, let’s take a look at paying this back shall we so let’s assume the first year i pay nothing back in principle and i begin paying back 100k per year just for simplicity it doesn’t have to be that we can pay it back however we want.
But five hundred thousand dollars in loan principal we pay that back at 100k per year your true payments were technically higher than that the reason why when i say true payments true out of pocket is the terminology or verbage i should use because with this i’m paying the hundred thousand dollars plus the loan interest three percent of four hundred thousand dollars is 12k so technically i’ve paid that year 112 000 going back to his question which was i’d like to account for the loan interest.
