Take Out a Loan on Your Whole Life Insurance Policy to Save Money

We’re currently seeing interest rates that haven’t been this low in a few decades due to the Fed’s continuous fight against inflation. For many of us, the cost of money has never been higher in our adult lives. It should come as no surprise that this is causing some borrowing behaviour to change. Mortgage rates were about 3% at the beginning of the year, and they are currently about 7%. Older Americans recognise that, despite what many may tell you, this is uncharted territory for Americans.

In reality, a lot of people have voiced concerns about what they perceive to be artificially low interest rates that have been maintained since the financial markets crashed in 2008 thanks to the Federal Reserve’s Quantitative Easing programme. We were all treated to an extended stretch of low interest rates that made taking out loans appear to have almost no repercussions. These days are over, and we’ll probably have to borrow money at a much higher cost, therefore it’s time to plan out the least expensive ways to borrow money when we need it.

This year, mortgage rates doubled.

As I previously stated, the typical 30-year fixed house mortgage (non-jumbo) was approximately 3% at the start of 2022. It is currently at 7%. Let’s take a look at the monthly payments needed for a “average” American home to put it into practical financial terms for you. As of the first quarter of this year, the median home price in the United States was $428,700, according to Fool.com. Your monthly mortgage payment on this home would be $1,446 if you put 20% down, had a 3% interest rate on a 30-year fixed mortgage, and paid no points. This payment amount also implies that you pay municipal utilities and property taxes out of pocket rather than via escrow.

My entire life policy, for instance, has a variable borrowing interest rate. It is linked to Seasoned Aaa bond values on Moody’s Index. That index was at 2.79% at the start of 2022; it is currently at almost 5%. However, my whole life policy would not have changed as Moody’s rate increased from 2.79% to 5% because it had a 5% floor interest rate.

There isn’t an actual loan payment if you financed the identical house as previously indicated with a 5% loan from a life insurance policy; nevertheless, if you utilised a mortgage calculator to figure out what would be an acceptable payment schedule, it comes out to $1,841. That is an option, in which case the principle is covered in full by the payment. This would result in a 27-year and 10-month loan payback period. This occurs because, unlike a mortgage, where interest makes up the majority of your payment for the first few years and just a small portion goes towards principal reduction, the interest on a life insurance loan is not amortised.

Auto Loans Are Also Increasing

The average interest rate on a new car loan for a borrower with a credit score in the top quintile (750 or above) was 8.98% as of August of this year. It was 9.23% for a secondhand automobile. The average rate for a new automobile was 10.94%, and the average rate for a used car was 11.19% for people in the second highest quintile (700–749). Long gone are the days when people with excellent or nearly excellent credit could get financing for cars costing double digits.

Once more, that loan for 5% of a life insurance policy seems really alluring.

Since I just had to buy a new automobile, I can actually use my own experience to compare life insurance to standard finance.

Considering the recent fluctuations in car costs, I wasn’t really inclined to do so. However, the final set of tyres on my 11-year-old Volvo waggon, which had less than 200,000 miles on the odometer, prematurely ate through them (they had less than 10,000 miles on them), and I gave up trying to figure out why.

I’m heading to the dealership to purchase a brand-new Volvo.

However, I made a rather uncharacteristic purchase by financing it. Sort of, anyway. My tyres were bad—the old Volvo had a nasty tendency of wearing tyres down too soon—and the “local” Volvo dealership isn’t close by when you live in Vermont.

Driving the ancient car there made me a little anxious, and I really didn’t want to drive it home. I knew I needed time for the money to transfer, so even though I had the money to buy the automobile, it wasn’t sitting in my checking account. In order to take it with us that day, we had to finance it.

These Conditions Are Most Likely To Persist

It’s likely that higher interest rates will persist for some time. Relatively speaking, life insurance loan rates will probably stay low. Years ago, we alerted folks to this. The mechanics of life insurance and how it functions in connection to other financial instruments are the key takeaways from this.

Yes, there wasn’t much of a difference between financing through a life insurance policy and financing through a bank for a while. However, life insurance was advantageous if interest rates increased to levels that were generally acknowledged as more reasonable. It was hard to see the forest through the trees, but these days it’s getting a whole lot easier.

Having life insurance gives you options, and as you age, it tends to make life insurance contracts stronger financially. This is because having life insurance makes one more exposed financially.

Finally, whole life payouts increase in tandem with rates, making this an even better deal.