How do we show what the difference between a 15 and a 30-year mortgage payment would look like if applied to a PUA (paid up addition) on a life insurance policy?

Using the Loan Analysis Calculator we can see that when the savings rate and loan rate are the same, the gross costs of each mortgage are identical to each other when properly measured over the same time frame.  However, when the mortgage interest deduction is taken into account, the longer mortgage has less cost.

In order to show the difference in the accounts when the same cash flows are applied, simply click the radio button next to payment on the longer mortgage, and put in the same payment required for the shorter mortgage.

This is going to assume that the earnings on the difference in the payments, is going to be the savings rate so keep that at a Life Insurance IRR number.  To get a more accurate analysis, run a life insurance illustration which does not include the additional payment and then run one, with the additional payment as a PUA, to see how much money would be available in the future to pay off the mortgage early.  Also, you will have the difference in the tax deductions to add to PUA’s as well.

How can I get an amortization schedule? 

We’ll use the Loan Calculator in the www.truthconcepts.com software to print a 48 month amortization schedule for a $35,000 loan to be paid back at 6.5%.  The picture below only shows until month 24, but the rest is there below in the actual software.

Next, we’ll select the from the Alternate Payback section a button to the right of Annual Loan Rate to see what happens if we paid the loan back at 10% instead of 6.5%.  You can see below that it changes the months to 44.47 and the Monthly Payment to 887.69.

Or we can Apply Excess Payment to the loan to shorten the loan period and save the extra four months.

If we don’t push “Apply Excess Payment” the calculator will accumulate the excess in a side fund at whatever Net Savings Rate you identify.

Click “Period Number” Box to change from sequential numbers on the left to an actual Start Date for an amortization schedule printout to give to your client so they know how to pay their life insurance loan back and any other loan payment stream.

Truth Concepts Loan Analysis calculates amortization schedules and the benefit of paying back loans under various scenarios and different rates and compare two loans for deductible and non-deductible loans.  Here is a tip for the Loan Analysis Calculator:

Always put the lower interest rate payback first in the “Annual Loan Rate” box as that reflects the actual loan information, then put in the alternate rate, time period or payment amount in the “Alternate Payback” panel on the right of each “loan box”.

Click “Period Number” Box to change from sequential numbers on the left to an actual Start Date for an amortization schedule printout to give to your client so they know how to pay their life insurance loan back and any other loan payment stream.

How do I figure out if I can get ahead by earning 6% if I have an 8% loan? 

At first glance, the answer is obvious, you don’t get ahead.  However, sometimes we get confused and think that since an account (say at 6%) has an increasing balance while a loan (say at 8%) has a decreasing balance, we might be able to get ahead.  Let’s look at it to see the whole truth of the matter. 

Take a $100,000 account earning 6% over 20 years.  Future Value: $320,713.

We know it earned $220,714 worth of interest.  This is calculated by taking the  $320,714 total and subtracting the $100,000 initial investment.

Now let’s look at a loan for $100,000 at 6%.

We can see that our loan payment is $9430.76 and if we multiply that by 20 years, we get $188,615.20, so we know that we paid $88,615.20 in interest.  So an incorrect deduction would be that it would make financial sense to have 6% earnings while we are carrying 8% debt, but this is only because all of the facts are not presented.  Let’s take a closer look.  The only way to make valid financial conclusions is to have exactly the same cash flows and time periods in each of the comparisons we are trying to make.

Under those guidelines, if we take the $100,000 and pay off the loan at 8%, then take the payments of $9430.76 that we no longer have to make loan payments of and pay them instead to the 6% account, in 20 years, we have $367,731, instead of $320,714 in the earlier example. 

So while it is true that we pay less interest ($88,615.20) than we earn ($220,714), that is only part of the truth.  The whole truth is that cost of money does matter and in the above example, our costs are greater than our gains.  This is the whole truth, even though we earned more interest than we paid out in interest.  There is a $47,017 improvement by paying off the 8% loan with the 6% account and redirecting the freed up payments to the investment.

One critical issue left over is liquidity.  Obviously $100,000 in an account leaves us in a more liquid position initially than $9430.76 being contributed to an account every year.  But eventually the investment account with $9430.76 being added annually will over take the account with $100,000 being contributed up front and will exceed it by $47,017 in the 20^th year.

So if initial liquidity is a concern, then it may be worth giving up some of the $47,017 gain to be in a more liquid position.  However, it is not true that there is a mathematical advantage in having a higher rate of interest on your debt than on your earnings.