Life Insurance Loans Are NOT Income

Today’s topic is very good, and I want you to listen closely. Life insurance loans are not income.

Let me start with a basic question. When you go to the bank and get a loan, is that income? Yes or no? Of course not. It is not income. It is a loan. You pay interest on it. When you buy a life insurance policy and take money out in a loan format, is that income? Yes or no? If anyone out there says yes, let me repeat myself. When you go to a bank and take out a loan, is that income? No. So, the same logic applies to life insurance.

These slick sales pitches you may hear about “tax-free income” from life insurance are nothing more than loans. All loans are tax-free because they are loans. This industry loves to play word games, and they twist language to make you think something magical is happening. But it is not income. It is a loan.

And I can speak on this because I represent all carriers. Life insurance companies sell annuities, and I am fully familiar with the life insurance world. I am a strong believer in life insurance, and I personally own a large amount of it. My wife and daughters will benefit from it someday.

But in my opinion, life insurance should be simple. Just like annuities, you should be able to explain it to a nine-year-old, no offense to nine-year-olds.

What Life Insurance Should Be

To me, life insurance means level term or simple term life. No moving parts, no market attachments, no indexing, none of the shiny nonsense.

Buy the largest death benefit you can for the least amount of money. That is real life insurance. But once you start getting fancy with all the internal components, illustrations, projections, and magic tricks, all you are really doing is buying your agent a very nice car with the huge commissions that come with those complex products.

Do not believe anyone who tells you a life insurance policy produces tax-free income. It does not exist. Tax-free income is:

• A municipal bond
• An Immediate Annuity inside a Roth IRA
• Social Security (to some extent, depending on income)

Tax-free income is not a loan taken from a life insurance policy, while you pay interest and fees.

Run the Numbers at Zero

If you still do not believe me because someone at a steak dinner seminar promised you the moon, then ask them one question. Run the proposal at zero. They will immediately say, “Sir, we cannot do that. Historically, the index has returned seven, eight, nine, ten percent.” Ignore all that. Say, “Humor me. Run it at zero for the life of the policy.” When they finally run it, you will watch the policy eat itself alive from the inside out. Why? Because loans, fees, and charges drain it unless the projected growth happens exactly as illustrated, which it never does.

What Life Insurance Is Actually For

Life insurance is for a tax-free death benefit. Period. Life insurance can also be used for long-term care through asset-based policies that have a confinement care component. That is legitimate. But life insurance is not tax-free income. They do not go together. It is apples and oranges. It is oil and water. Yet people are constantly being sold this fantasy.

A Real Example

I had a gentleman call me recently who had purchased four life insurance policies because someone told him he would receive tax-free income.

He did not believe me when I explained it was just loans. So, I said, call the carrier and ask them directly whether the distributions are income or loans. He called back two days later and said, “Stan, they are loans.” You think, player? Of course they are.

If It Sounds Too Good to Be True

If it sounds too good to be true, it is, every single time without exception.

In the life insurance and annuity sales world, you are going to hear incredible claims. You will hear, “My mama owns this. My uncle owns this. All my clients do this.” Who cares? It is about you.

If it sounds too good to be true, it is. With life insurance and annuities, you buy them for the contractual guarantees of the policy. Not the hypothetical nonsense. Not the unicorns chasing butterflies. Contractual guarantees only.

Final Thoughts

I do not understand how some agents get away with pitching these schemes. My grandfather used to say, “If you tell the truth, you do not have to remember anything.” That is our business model.

My name is Stan The Annuity Man. See you next time.