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December 18, 2010

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Nick --

You're working with me regarding another post? That's news to me...

Nick said: "One part of the life insurance vehicle that hasn't been mentioned is the fact that when you take a loan from your policy you are taking that loan out against your cash value. In other words if you have $50,000 in cash value the company is willing to give you a loan using the $50,000 as collateral. So one of the corrections I would make to your spreadsheet is the fact that you will continue to earn interest on the full cash value regardless of whether or not you have a loan out.:

Looking at Bruce's spread sheet it looks to me like he's considered that. The cash value in the policy keeps going up and is not reduced by the $40k loan. THe dividend rates also keep going up after the $40k loan.

Nick,

I didn't subtract out the loan from the cash value when actually calculating out interest. That's why the cash value column doesn't show the impact of the loan, but I did add the next column indicating "true balance" (I don't know what the technical term would be for that column) but it should represent what the balance is with the loan subtracted from the account and that also would be the correct value to compare against a banking account. So we should be in agreement.

Unfortunately, the spreadsheet doesn't show any of the formulas I used but that is a limitation of using google docs to share it. I really don't know how else to quickly share the information across the internet.

As far as age, fees, commissions, etc. I am the first to admit I don't know the actual values. To some extent I don't much care as long as I can figure out how to come up with an accurate cash value. However, I did find an illustration that came out with similar numbers as I have shown. From that, I just tried to reverse engineer where those numbers came from. I don't expect my spreadsheet to be 100%, at least not yet. But, as I find out more information I plan on updating the spreadsheet accordingly so that I can play with various scenarios and see if there is a scenario that might be advantageous for me.

@ Bruce, Jim, thanks for pointing that out, at first glance i didnt' notice that. I have to say that comparing your 'true balance' column to a banking account would not be accurate in this case, because the cash value in your policy will not be reduced by the amount of the loan, as the loan is not technically coming from your policy, its coming from the company who uses your cash value as collateral. The cash value will be untouched and continue to grow at it's full amount.

Except the "True Balance" would represent the amount of the cash value that one would still have available to use as a loan from the insurance company. This is the only way to compare "apples to apples" when comparing an insurance policy versus using a bank account instead. And, once the loan is paid off, the column once again becomes equal to the actual cash value in the account.

Where is the post that Nick was promising?
So is the conclusion that this strategy doesn't work?
Has anyone taken whole life policy after this discussion?

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