How Soon Can I Access Funds From Life Insurance?
One of the most frequent questions asked by people looking for liquidity in life insurance is, “How soon can I access my funds after starting the policy?”
Unlike 401(k)s and IRAs, which lock up your funds until age 59 ½ with hefty penalties for early withdrawal, you can access your liquidity inside your policy within 15 to 30 days. Let’s dive into how an overfunded whole life policy works and how soon you can start borrowing against the cash value.
Traditional Whole Life Insurance Policies = Late Liquidity
Liquidity is often an early issue with a traditional whole-life insurance policy. Here’s how these types of policies usually work:
- Year 1: You contribute $100,000 in premiums but have zero cash value.
- Year 2: You contribute another $100,000, bringing your total contribution to $200,000, but you still have zero cash value to borrow against.
- Year 3: You finally start to see some cash value, which you can borrow against.
- Year 15 to 25: Maybe your policy “breaks even” (more dollars in the cash value than you have personally contributed).
These policies often focus on maximizing the death benefit rather than early liquidity. This is why financial advisors like Dave Ramsey and Suze Orman criticize whole life insurance, saying it’s not an effective place to store money. And for the typical policy design, they’re right.
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Infinite Banking Policies = Early Liquidity
Infinite banking policies are designed differently, focusing on early liquidity and control over your cash value. The death benefit is shrunk as much as possible while the living benefit (i.e., cash value) is maximized as much as possible.
The “infinite” in infinite banking refers to the infinite ways to use the funds you get from borrowing against your policy's cash value. These could be for personal, business, or legacy-building purposes. At BetterWealth, we generally advise folks who are in the income accumulation phase of their retirement planning to invest in an income-producing activity in which they have specialized knowledge or experience. The name of our strategy– The And Asset – refers to the idea you can put your money into life insurance AND use it elsewhere via a policy loan.
These policies allow you to access the funds much sooner, often within the first month of starting the policy. Here’s how they compare:
- Year 1: You contribute $100,000, and by the end of the first year, you could have $75,000 to $90,000 of your premium contributed available as cash value.
- Year 5 to 7: There are more dollars inside your cash value than you have personally contributed to the policy from the same time period, and your policy “breaks even.”
- Even though most illustrations show cash value as an end-of-year value, you don’t have to wait that long to borrow against it. Illustrations generally show end-of-year values when the dividend is paid, increasing your cash value.
How Quickly Can You Access Your Funds?
Sometimes, clients can borrow against their policy within two weeks (i.e., 14 days) after funding the initial premium.
However, a more realistic and conservative estimate is that you’ll have access to your cash value within 30 days. This gives the insurance company adequate time to ensure the funds have cleared the bank while completing due diligence. Some carriers are more friendly towards issuing policy loans than others, so be careful which carrier you choose to work with.
Typically, within 15-30 days, you can borrow against 90-98% of the net cash value, depending on the carrier. Remember, the initial cash value is less than the year-end cash value (once dividends and interest have been paid).
For example, if you frontload a policy with $100,000 and the cash value at the end of the first year is illustrated to be $92,500, your initial cash value will be less than that illustrated number as no dividend or interest has been paid yet. Given the example above, you would likely have a net cash value immediately of between $82,000 and $89,000 - again, depending on the carrier and how it is designed.
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Case Study: How People Borrow Against Their Cash Value
Take Sam, a 42-year-old real estate investor seeking to finance his next property purchase without relying on traditional banks or dipping into his savings. He decides to explore the infinite banking using an overfunded whole life insurance policy:
- Policy Setup: Sam works with a financial advisor to structure a policy focusing on early cash value accumulation. He contributes $100,000 in premium payments on day 1, knowing he needs quick access to those funds to invest. His initial cash value that he can access is just over $87,000.
- Liquidity by Day 18: On day 18, Sam gets a hot real estate lead and needs $65,000 for the purchase. Sam logs into his carrier portal and sees that he already has the money in his policy.
- Check by Day 19: Sam requests an unstructured policy loan from the carrier, and in four business days, he receives an ACH transfer for $65,000 to his bank account.
- The Real Estate Opportunity: Sam uses the loan to make a down payment on a four-unit multi-family property. The property generates enough rental income to cover his mortgage payments while providing additional monthly cash flow. Sam puts a portion of this cash flow back into his policy every month, paying down the loan over time. His life insurance policy’s cash value continues to grow, even though he had taken a policy loan against it. Once he satisfies the original loan, the dollars get uncollateralized, and he can borrow against those same dollars in the future.
- Outcome: After four years, Sam repays his policy loan and enjoys the rental income from his property. Additionally, his life insurance cash value has grown, which gives him even more borrowing power for future investments. He even took a second policy loan in year three to fix and flip another deal instead of using his private money lender.
- Key Takeaway: By using his policy as a financing tool, Sam can make strategic investments while securing the uninterrupted compound growth of his life insurance cash value.
Conclusion
The speed at which you can access funds from your life insurance policy largely depends on how the policy is designed and the carrier you work with. Infinite banking policies are structured to provide liquidity and borrowing opportunities much sooner than traditional whole-life policies.
If you want to learn more about how life insurance can fit into your financial strategy, check out our And Asset Vault. This free resource includes case studies, calculators, a handbook, and more to help you make informed decisions about life insurance. Whether you're looking to fund real estate investments or need liquidity for business opportunities, life insurance might be the flexible tool you're looking for.
Connect with a wealth coach today to explore the powerful potential of life insurance!
Frequently Asked Questions About Accessing Your Cash:
How does borrowing against a life insurance policy affect the death benefit?
Borrowing from your policy’s cash value doesn’t reduce the death benefit permanently, but it does temporarily decrease the benefit by the amount of the loan plus any interest owed. If the loan isn’t repaid and you die, the amount borrowed and any interest will be deducted from the death benefit paid out to your beneficiaries.
How do interest rates on policy loans compare to traditional loans?
Life insurance policy loans often have favorable interest rates compared to personal loans or credit cards.
Interest rates charged by the carrier can vary from year to year or even month to month. However, we typically see borrowing rates below the prime rate by one or more percentage points across the industry. As of this writing (Oct 2024), the lowest lending rate at the carriers we work with is 5%, and the highest is 7%. Another benefit to policy loans over traditional loans is that the insurance carrier will only ever ask you two questions when you request a loan.
- Do you know how this will affect your death benefit?
- How much do you want?
No credit check, lengthy underwriting, or blood of your firstborn son is required. They are contractually obligated to lend against your policy if there is sufficient cash value.
Are policy loans tax-free?
Yes. Life insurance policy loans are generally tax-free if the policy remains in force. If the policy lapses or is surrendered while you have an outstanding loan, the IRS may consider the loan as taxable income.
Can borrowing against life insurance affect policy dividends?
It depends on whether the carrier is a direct or non-direct recognition carrier. Direct recognition carriers assign a different dividend rate to any portion of the cash value that has been collateralized compared with non-collateralized cash value.
Non-direct recognition carriers do not differentiate between portions of cash value that have been borrowed against and those that have not. Check with your carrier to understand whether they are direct or non-direct recognition.
At face value, non-direct recognition seems more attractive. It’s nice not to have a spread between the loaned and non-loaned dollars. The past 30 years of rates have shown that non-direct recognition is more advantageous than direct recognition in some cases (when interest rates are falling).
However, direct recognition is more advantageous when rates are static or climbing. The denouement, and our stance on this choice, is that if you choose the right policy design for your situation and you understand how your policy works, then the difference in loan recognition DOES NOT MATTER over the long term because no one can predict where interest rates will be in the future.
Ta-Da!
What happens if I don’t repay the loan?
If you don’t repay the loan, it will accrue annual interest. At the end of the year, if interest is not paid, it is added to the outstanding loan principal.
While there’s no obligation to repay the loan on a set schedule, the loan plus interest will be deducted from your death benefit if it’s not paid off when you pass away.
Additionally, your policy could lapse if the loan balance exceeds the cash value (one reason why you must be careful with IULs and other UL-based products).
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