The Disadvantages of Policy Loans from Non-Direct Recognition Companies

Should you exit out of your policy loan once interest rates spike upward?
Should you exit out of your policy loan once interest rates spike upward?

Yesterday, we discussed the advantages of using a policy loan over a withdrawal to access your cash value within your whole life policy.  Today, let’s look at the disadvantages to using a Policy Loan to access Whole Life Cash value, which are:

  1. There is a short term cost for the loan.  In normal circumstances, for most people, we feel that the cost of this loan is more than offset by the benefits.  (Although every situation is different and this is best determined with the help of your agent who fully understands these issues.)  However, we do see a time coming soon (within the next 5 years and perhaps as early as a month from now) where interest rates will spike upwards.  When this happens, it might make sense to switch a policy loan to a withdrawal so that the spread you are paying for the loan is not too high.  But again, the beauty is that this can be done at any time.
  2. If you interpret scripture to mean that you should never take a loan of any kind, then perhaps you should lean towards withdrawals.  We’ve taught in other places what the scriptures say about borrowing and lending and won’t do a full discourse of that here, but while you should be very careful about borrowing because it can lead to ruin, in some instances it is the wise thing to do.  We say this having fully taken into account the words of Moses, Solomon, Jesus, and Paul.  In the case of a policy loan, it is your contractual right to take the loan, and you will always have the ability to pay the loan off at any time that you want to (otherwise the company would not offer you such a favorable loan), thus we feel this is a valid usage.  However, if you feel that you should not take a loan for any reason, then the withdrawal is a good method for utilizing the cash value of your policy.

This post is Part 4 in the series Accessing Whole Life Cash Value. To continue with this series, click on Pt 5. To use this as a growth tool to better understand your own calling, you might start by reading Pt 1, Pt 2 and Pt 3.

Photo credit: John Ashcraft

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