Outsourcing Policy Loans
Overview
The current interest rate environment has created an unusual opportunity to maximize life insurance cash values. Determining the value of this option requires evaluating two current life insurance illustrations of the same policy.
The ability to access cash surrender value through a non-taxable policy loan is a valuable feature of life insurance. This feature is often enhanced by “wash loan” provisions which effectively amount to a zero net interest rate on the policy loan.
However, current low interest rates improve on this arrangement by allowing some policyholders to borrow from commercial sources at a rate lower than the crediting rate on the cash value. This rate arbitrage is not always obvious and can even be obfuscated by life insurance companies.