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I've been looking into whole life insurance policies. I keep hearing that policy loans are very cheap, but haven't heard any actual numbers. What rate are policy loans typically loaned out at right now? And, how much does the rate vary?

  • So you're thinking of buying whole life insurance just to take out a loan against it? The rate on the loan itself may be small but you'll more than make up for it in insurance premiums. Also you can only borrow against the cash value that's built up, not the insurance value. – D Stanley Apr 17 '17 at 14:58
  • @DStanley, no, I'm just considering all facets of whole life before making a decision. And yes, I am aware of the other points you raised. – Eddified Apr 17 '17 at 17:30
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This is going to vary from insurer to insurer, and likely year to year. Typically an insurer will set what it calls the guaranteed rate of return for whole life policies and will allow you to take loans against the cash value of your policy at some adjustment to that rate. Also typically you pay the interest back to yourself less some small administrative fee.

Some insurers have whole life policies called something along the lines of an "accelerated cash value" policy or a "high early cash value" policy, stick to these ones. The commission structure is less favorable to the agent/broker but much more of your premium is recognized as cash value earlier.

The benefit (for lack of a better word) to taking a loan against your own cash value over taking a loan from a bank is the severely reduced process. There's no underwriting for your loan like there would be from a bank. If you're laid off maybe you can't get a loan from a bank but you can scoop some money out of your policy on a loan basis or alternatively you can just surrender the policy and take the accrued cash value.

Many people will poo-poo the value of whole life, but fact of the matter is your underwriting status can change in the course of your life and it's possible that in the future you won't be able to buy any life insurance. There's nothing wrong with having something permanent to supplement your larger term policies.

Personally, I view diversification as having money in a lot of different places. This strategy is probably not as efficient as it could, but I don't like the idea of having all my eggs in one basket. I have cash in a lock box at home, cash savings, CDs, a personal loan portfolio, bitcoins, index funds, individual stocks, commodity etfs, and bond funds spread in traditional 401(k), ROTH IRA and regular taxable accounts spread out to 6 different institutions. I don't personally own any whole life, but I'll probably buy a small policy before my next 6-month birthday; I might as well put some money there too. All of this is to say, do not put all of your money in a whole life policy, and do not buy all of your life insurance needs via whole life.

  • Yes of course it will vary. That's why i specified "now" and "typical". Sigh. I just want a ballpark. – Eddified Apr 19 '17 at 2:01

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