Usually a life insurance policy will grow the cash value in a policy account in three ways. These are:
As a rule of thumb, a policy will have a blended internal rate of return (the rate of return – before tax – based upon the net effect of both the interest and dividend payments to the policy holder) of approximately 6% to 8%.
Interest payments are usually based upon the cash value in an account. Usually the insurance company will establish either a fixed or a minimum and maximum interest rate that will be paid on the cash value in an account.
Dividends payments are once again a function of the cash value of the policy and calculated as discussed above.
When you borrow from your policy your dividends continue. The reason your dividends continue is because borrowing from your policy does not decrease the cash value in your policy. Rather, the cash value in your policy is used to collateralize your loan.
The insurance company loans the monies to you at some rate of interest they deem necessary to make the policy work. This is what you are paying for, the use of the money.
If you decide to pay extra interest on your loan, the difference between what the insurance company expects and what you pay goes straight to increasing the cash value of your account.
This extra money grows your dividend payment and helps to create an ever growing pool of money for your “banking system”.
Remember that all growth within the policy has occurred tax free, and these cash values and death benefits can be passed onto the next generation with no or limited tax implications.
For more information contact Trugo Financial Services, Inc. Sara Truong, DDS firstname.lastname@example.org