Borrow Through an Outside Line of Credit and Your Policy Never Records a Loan

There are two doors to the cash value in a policy. One is a loan straight from the insurer. The other is an outside line of credit, where a bank lends against the policy as collateral, and that second one is the workhorse in Chapter 10 of Money in Motion. Here's how it works.

You sign your policy over to a lender as collateral, the same way a house secures a mortgage, and in return you get a revolving line of credit against the cash value. You haven't sold or pulled out anything. The cash value stays where it was, still growing and still earning its dividend.

The credit limit is high relative to the collateral, commonly about 90% to 95% of the cash value. As the cash value grows, the limit grows with it, and most lenders raise it automatically once or twice a year without making you reapply or pulling your credit. The rate is low because the lender's risk is low. These lines often open with an introductory rate and then move to a variable rate tied to the prime rate. Variable means it can rise, so run any deal at a rate higher than today's, so an increase can't turn a good deal into a bad one. A draw typically lands in your account the next business day, where a loan from the carrier can take several.

Here's the part I like best. When you borrow straight from the insurer, some carriers trim the dividend they pay on the borrowed money. Borrow through the outside line of credit and the policy never records a loan, so it keeps paying you the full dividend the entire time your money is out working. Dividends aren't guaranteed, and the catch is that the rate you pay the bank is not guaranteed either.

A few more features. The line of credit usually doesn't report to the credit bureaus, so it won't show up against you when you apply for a mortgage. It renews on its own, with no fee for leaving it idle and no penalty for paying it off. And while there's room on the limit, there's no required monthly payment, but no required payment is not the same as no payment.

Two cautions belong here. The line of credit is secured by your policy and not your cash flow, so the carrier will not take a missed premium out of it for you. You have to keep the premium paid, and you can use the line of credit to do it if a year gets tight. And if you default, or you die with a balance, the lender takes what it's owed out of the policy and steps aside. Your beneficiary gets what's left.

The chapter walks through a house flip financed this way, with the numbers, and you can find it in the paperback, Kindle edition, or free digital copy. Ask any lender for its terms in writing before you sign your policy over.