Disclaimer
This article is intended as a general guide. Licensing and regulatory requirements vary across provinces, and specific guidelines may change. Financial advisors should consult their provincial regulator or MGA to ensure they meet all necessary requirements and stay updated on provincial policies.
How to Use Whole-Life Insurance as a Personal Bank Account
Using participating whole-life insurance as a personal bank account revolves around borrowing against the policy’s cash value. Here’s how people typically use this strategy:
1. Accumulating Cash Value Over Time
Participating whole-life insurance policies build cash value as premiums are paid, and with each dividend cycle, the policy’s cash value can grow even more. This accumulation can take several years, but once a substantial cash value has built up, the policyholder has a personal financial asset to use whenever needed.
2. Borrowing Against Cash Value
After a few years, policyholders can borrow against their cash value to fund personal needs or investments. Since this is considered a loan from the insurer rather than a traditional loan from a bank, credit checks are unnecessary, and there’s no repayment deadline. Borrowing from the policy’s cash value is also often tax-free, as the IRS doesn’t consider it income.
3. Flexible Repayment Structure
Loans taken from the policy can be paid back at the policyholder’s convenience or not at all. If the loan isn’t repaid, it will be deducted from the policy’s death benefit. However, many policyholders choose to repay the loan in order to restore their policy’s full value. This flexibility is particularly useful for those who need quick access to funds without the pressure of rigid repayment terms.
4. Dividend Reinvestment for Faster Growth
Many policyholders use dividends to purchase additional insurance, which further increases the policy’s cash value and death benefit. This reinvestment creates a compounding effect, allowing the cash value to grow faster over time.
5. Funding Large Purchases and Life Events
Policyholders commonly use their policy’s cash value to make significant purchases or to cover unexpected expenses. This could include paying for a child’s education, covering emergency medical expenses, making a down payment on a home, or even funding a business venture. Instead of withdrawing from traditional savings or selling investments, policyholders can use their whole-life policy as an accessible financial reserve.
