| Loan on cash value insurance policy |
|
|
|
|
|
johnnyinvegas
New Poster
Cash: $ 0.45
Posts: 2
Joined: 12 Dec 2010
Location: Vegas Baby
|
| Loan on cash value insurance policy |
 |
|
First off I am not a big fan of cash value policies and do not want this to turn into a CV vs. Term discussion.
My 82 year old father has a cash value policy that he has been carrying since the early 70's. He currently pays $300 per year for a 10,000 policy. During the 80's he took out a couple of loans against the policy. At the same time changed the policy so that all dividends would purchase "Paid-Up additional insurance".
Since 2000 the loan amount with interest and the paid-up additional insurance have been keeping pace. For example, last year his insurance benefit increased by $1400 and his loan amount increased for about the same amount. It seems logical to me that we should change the policy so that the dividend should be used to pay down the loan.
If he died today the policy would pay about $11,000 broken down as:
$10,000 Death Benefit
$24,000 Additional Paid Up Insurance
-23,000 Loan Amount
Would appreciate insight as to whether we should leave this policy as is, or change it to use the dividend to pay down the loan instead of buying additional insurance.
Thank You
|
Sun Dec 12, 2010 4:05 am |
|
|
coaster
Senior Advisor
Cash: $ 1357.80
Posts: 6686
Joined: 11 Oct 2005
Location: Wisconsin
|
It doesn't really make any difference, does it? The insurance company is either going to charge interest on the loan, paid out of the dividends; or they're going to sell you additional insurance, paid out of the dividends. It's no surprise they've been "keeping pace." Insurance companies' headquarters buildings are filled with numbers people whose jobs are to make sure this is so. And surprise, surprise, if you use the dividends to pay down the loan, the result is still going to be the same. (Remember, the dividends would have been buying additional insurance, which generates additional dividends).
So, the upshot is: do nothing. Your net result when your father passes away will be very close to the same no matter what you do now.
Your insurance agent should have some very fancy software that will run these hypotheticals for you. My bet is the results are within one percent of each other.
|
|
Sun Dec 12, 2010 7:36 am |
|
|
oldguy
Senior Member
Cash: $ 309.30
Posts: 1481
Joined: 21 May 2006
Location: arizona
|
quote:
First off I am not a big fan of cash value policies and do not want this to turn into a CV vs. Term discussion.
OK. But FYI - that $300/yr in the SP500 Index was $194,000 as of November 2010.
|
|
Sun Dec 12, 2010 4:42 pm |
|
|
johnnyinvegas
New Poster
Cash: $ 0.45
Posts: 2
Joined: 12 Dec 2010
Location: Vegas Baby
|
| Thanks |
|
|
Thanks for the reply. However, after thinking about this a bit longer it seems clear that paying off the loan with the dividends is better because as the loan is paid down the spread between the dividend amount and the loan interest will increase.
194K on 300 per year. That would of been awesome. I only wish we could still get average returns of 11%! 2000 - 2009 average was 1% 
|
|
Tue Dec 14, 2010 12:03 am |
|
|
|
