What's the difference between simply taking out a loan and policy loan?

[Lloyds of Lubbock]

I *think* Guardian does this, but don't quote me on that, This is correct

 

[LostDollar]

To your other question, yes carriers show it as one loan. It is basically a non-amortized, interest-only LOC. But, the way I do it for myself and my clients is I itemize each loan, and amortize the loan and create something "familiar" with terms and scheduled payments. Something about structure helps clients and they seem appreciative that their policies don't lapse

I would find that amortization table business more confusing than helpful.

 

[Allen Trent]

Some carriers do charge in advance. I *think* Guardian does this, but don't quote me on that.

But a lot of carriers do not. In these cases, policy loan payments are applied against the principal first before the interest payment is made at the end of the year. If you're making regular payments, you're paying down the principle during the year. So, in month 1 after you take the loan, you make a payment (X). Your loan principal is now P-X. And interest only accrues against P. So, with each payment against P, the total interest charge declines during the year. I'm not sure which carriers you use. But, I know for a fact this is how it works at both Mass and Penn. I believe it's the same deal at NYL and NML. My carriers do break down loan principal, loan payoff, accrued interest, etc.

To your other question, yes carriers show it as one loan. It is basically a non-amortized, interest-only LOC. But, the way I do it for myself and my clients is I itemize each loan, and amortize the loan and create something "familiar" with terms and scheduled payments. Something about structure helps clients and they seem appreciative that their policies don't lapse

Thank you for the clarification. So, if I start a policy year with $10k balance at 7% & pay nothing, balance at end of year is $10700. Are you saying if I write a check 6 months in for $5,000 that they are going to say my loan was only $5k & only charge $350 for that year? I would assume instead that I would be charged 3.5% on 10000 for 1st 6 months of the year & 3.5% on 5,350ish. I still am a little hesitant to believe the insurance carriers are not collecting interest per day on pro rata amount of the daily loan payoff

 

[Allen Trent]

I would find that amortization table business more confusing than helpful.

And potentially a violation of carrier selling agreements if not approved by carrier for sales or servicing of contracts if the math, disclaimers & warnings don't match carrier process, etc

 

[david_lewis]

Thank you for the clarification. So, if I start a policy year with $10k balance at 7% & pay nothing, balance at end of year is $10700. Are you saying if I write a check 6 months in for $5,000 that they are going to say my loan was only $5k & only charge $350 for that year?

That's not at all what I'm saying, nor what was implied.

 

[Allen Trent]

That's not at all what I'm saying, nor what was implied.

Sorry if I am coming across as difficult. I am honestly trying to figure out what you meant into the post where you said policy loans are significantly different because payments during the year are applied to principal & not interest. That gives the impression that a bank loan that receives extra payments during the year gets applied to interest.

Don't both literally receive the loan payment & make the loan balance lower, thus saving interest cost.

I sincerely am trying to understand how this is a significantly different aspect between the 2.

All the rest of the items made complete sense to me. (Don't need to qualify for loan, no structured payment set in stone, no hot to credit report, etc)

 

[david_lewis]

...policy loans are significantly different because payments during the year are applied to principal & not interest.

That's the significant difference. Typically, when a borrower repays a loan, a large portion of the payment goes toward interest, a small portion goes toward principal. The lender is essentially trying to collect interest at the beginning of the loan. A policyholder is paying accrued interest at the end of the year on whatever outstanding balance there is.

Ex: On a conventional P&I loan for $300,000, term 30 years @ 5%, the borrower pays:

Monthly Pay: $1,610.46
Total of Payments $579,767.35
Total Interest $279,767.35

Using a policy loan instead of a conventional loan, a policyholder pays:

Monthly Pay: $1,610.46
Total payments: $579,767.35
Total interest: $263,123.43

... a difference of $16,643.93.

The loan is technically paid off with the insurer in month 349. If the policyholder continues on the schedule, the additional payments could be put into a savings account, or used to buy paid-up additional insurance, or spent elsewhere. Or, the policyholder could call the early payoff a win in and of itself. Any curtailment on the policy loan has a dramatic difference in the amount saved vs additional principal payments on a regular loan.

It only takes a few loans done this way (they don't all have to be large loans) to save a substantial amount of money.

That gives the impression that a bank loan that receives extra payments during the year gets applied to interest.

No, it doesn't.

Don't both literally receive the loan payment & make the loan balance lower, thus saving interest cost.

Fully amortized loans are very different from non-amortizing, interest-only LOCs.

I sincerely am trying to understand how this is a significantly different aspect between the 2.

See above.

 

[david_lewis]

And potentially a violation of carrier selling agreements if not approved by carrier for sales or servicing of contracts if the math, disclaimers & warnings don't match carrier process, etc

I should probably clarify: I am helping them figure out how much is needed every month to pay off the loan/loans over a certain period of time (given the carrier's policy loan rate), and making a list of all the loans they have outstanding and the payments they're making to the insurer (that can be matched up to whatever the insurer is receiving). The actual policy loan illustrations are done through the carrier's software if they want to see how it's illustrated. What carriers seem to be concerned about is an excel spreadsheet that identifies as a policy illustration. That's not what I'm doing.

 

[Bilmocraig]

Boy, that all looks complicated. Is there any literature I can read on this topic to better understand all the peculiarities, or maybe some online classes?
I want to start a small business, and now I am looking for the best possibility to take a loan. I want to get the one with the lowest interest rate, not to pay the bank too much. I already do some reading online on resources like https://www.youngandthrifty.ca/, but I think I need more now. I would even pay for classes that would explain to me how those loans work and what would be the best option for me as a beginner with a medium income.

 

[f55c6]

My NYLIAC VUL may work differently than the OP's whole life policy. Here's how it works in a nutshell. When a loan is requested, an amount is transferred from my "separate account" (my investments) to the fixed cash account (currently earning 4% interest). The amount of the loan in the fixed account is kind of set aside and will only be credited with an interest rate of 2% (not 4%) as the remainder of the fixed account cash. My current loan interest rate is 6%. Therefore, the 6% loan interest minus the 2% credit leaves me with a net 4% interest rate.

Loan interest not repaid upon the annual policy date will be charged as a new unpaid loan. Loan repayments are allocated to the investment division using my current allocation in effect for the payment of premiums. I don't understand how the aforementioned works and would investigate further before I requested a loan. In any event, any unpaid loan amount is deducted from the death benefit upon death. The cash surrender reflects the outstanding loan balance plus interest owed. If any unpaid loan amount and interest exceeds the cash value of the policy that's when the trouble begins. A noticed will be mailed and you will be given 31 days to make good on the excess of the loan amount and accrued interest over the cash value less the surrender charge.