Can You Run Expenses Through a Policy Loan?

Can you run expenses through a policy loan? Let’s talk about where this idea comes from, and why you should proceed with caution.

Whole life insurance is a powerful asset because it can do many jobs. While its primary and most important function is insurance, it also provides clients with a place to store wealth and use it in a more efficient manner. However, it’s important that we don’t over-estimate its functions in a way that causes clients to make less efficient decisions with their money. 

For example, policy loans can be an incredibly efficient way to finance certain purchases and investments. It’s efficient because clients can leverage their cash value without actually withdrawing it, which gives the cash value opportunity to keep growing uninterrupted. In turn, clients can then repay the policy loan on their own terms. 

What gets lost in translation is that this policy loan is not something you do for yourself. The loan comes from the insurance company. This means that when you borrow against your life insurance, you pay interest to the life insurance company. You are NOT paying yourself interest. 

Unfortunately, this misconception leads clients to believe that they should run everything through their insurance policy, including everyday expenses. So let’s prove it out… can you funnel your expenses through your life insurance policy and come out ahead? 

Can You Run Expenses Through a Policy Loan? Understanding Life Insurance Loans

So, can you run your expenses through a policy loan? Say your client has a business with a $500,000 gross revenue, and their take-home income from that is $200k. What should the client be putting toward their life insurance? 

They may want to put the company’s entire revenue into a policy, and then use policy loans to pay expenses like taxes, payroll, etc. The problem with this is that when borrowing against a policy, the client is adding an interest cost to their balance sheet. In other words, they’re just making their expenses even greater than they already are. And the problem is that they’ve got to pay those loans back. If the client does this with future revenue, then they’re just perpetuating a cycle where they’re always a bit behind. 

And before you say cash value earns interest and dividends, remember that it does this whether or not they use the account to pay expenses. So really, they’re not making anything more efficient. They’re just tacking on a percentage rate, and your expenses will always be debt. 

When Does a Policy Loan Make Sense?

The question now, is, when does a policy loan make sense?

To put it simply, if what your client is looking to do is get a return, then all they have to do is invest in something that provides a higher ROR than the cost. The difference between an expense and an investment is that an investment is (ideally) going to provide a return. For example, if the client invests in a rental property, they’re going to get monthly cash flow. They have some flexibility in what you charge for rent so that you do experience a return. And this cash flow can contribute toward the repayment of the policy loan. Once the client has paid the policy loan, they’ve got the monthly cash flow to enjoy however they choose. 

Expenses are just expenses, and while your client may be able to push up their net profit by adding certain expenses, this is not the same thing as earning interest. 

Instead of putting your client’s total business revenue into a policy, start by identifying their Human Life Value. That’s how they’ll know their maximum insurance capacity. From there, have the client decide how much of their income they want to divert to insurance. Once they’ve built up cash value, you can certainly run illustrations with them on the efficacy of various investment opportunities. There are various ways to use Truth Concepts as a life insurance policy loan calculator to determine how your client can reduce interest costs and make their loans more efficient. However, you’ll be hard-pressed to prove that adding interest to expenses is more efficient. 

Other Uses for a Policy Loan

In this conversation, it’s also worth noting that not every valid use of a policy loan is going to make your clients money. The value of whole life insurance is that clients can pay for emergencies and/or opportunities without losing the value of compounding interest. It’s a pool of cash for any of life’s needs. 

On one hand, this means that clients can use their cash value for literally anything they want. There’s no approval process like there is with a bank, so clients can take vacations, pay bills, or splurge on a boat. What life insurance does is give clients more options and flexibility to handle what life throws their way. The price of that flexibility is sometimes paying interest, and that’s not necessarily a bad thing. The best path is going to be the path that helps your client keep moving forward. 

On the other hand, cash value isn’t a bottomless source of money. Clients can only borrow what they have available, and what is not already collateralized in a loan. This means it’s in their best interest not to use it frivolously. If the client wants to buy a boat, it’s in their best interest to know exactly how they’re going to repay that loan. That way they replenish their accessible cash value and can use it for other opportunities and emergencies. 

Whole life insurance isn’t magic. There’s no get-rich-quick scheme, or secret loophole to make money appear from thin air. There are only good habits, patience, and efficiency. 

Want to Learn More?

Become the Truth Concepts expert and learn exactly how to prove the concepts you share with clients by attending a Truth Training. You’ll learn how to use each calculator in the software, as well as the concepts you can demonstrate. In the meantime, learn how to compare whole life insurance IRR to other assets in your recent article.