The Naked Buck – Exposing Financial Truth

A number of insurance companies will provide policy loans or collaterally secured loans based on the security of their policies.  These programs allow policyholders to borrow up to 100% of the policy’s cash surrender value and will guarantee the interest rate of the loan for 10 years or longer.  Insurance companies also will guarantee the interest rate will equal the loan interest rate less 2%. 

Given these and other unique loan features, it was determined that the loan interest rate should be higher than traditional policy loan or fixed-term credit facilities and as a result most insurance companies established a current loan interest rate of 10% which provides a guaranteed credited interest rate of 8% for the cash value of the policy supporting the loan.

A policy holder may wish to enter into this type of loan arrangement due to the fact the money is being borrowed to earn business or investment income and the interest is deductible against the borrower’s income.  For example if a borrower in a 45% tax bracket and pays 10% interest on the loan the after-tax cost borrowing becomes 5.5% while at the same time the insurance policy is growing at a rate of 8% (tax deferred ).  The Policyholder can receive additional loans secured by the growth in the cash vale which can create a positive cash flow to the borrower on an after-tax basis which can be used for any purpose.

Given the attention these programs have received  as the result of comments made by the Canada Revenue Agency at the 2008 Canadian Tax Foundation meeting it is important to note first and foremost the CRA wants to confirm that the borrowed funds are being used for qualifying investment purposes. Therefore it is very important to ensure that the borrowed funds can be traced into income-producing investments.

For more information on the “10/8″ Insurance Loans please contact Stephen Hill at 800.932.9989 or email financial@septen.com

Tweet This Post