Opportunity Cost, it was lost, but now it is found.
I recently wrote an article on Whole Life Insurance, and in the article I spoke of policy loans, which I will briefly recap here, so you can understand the next piece, opportunity cost, the opportunity was lost, but now is found.
The main attribute of Whole Life Insurance is the cash value. In addition to a portion of your premium being used to pay for the death benefit, a portion goes into a savings account, inside your policy, which accumulates tax free at a compound interest rate determined when you buy your policy . This savings account is called “policy cash value”. This cash value makes it possible for you to apply for a “Policy Loan”. You can apply for and be automatically granted a loan, secured by the cash value. However your cash value continues to accrue tax free, compound interest.
A Key pointThis loan is NOT from your cash value, it is secured by your cash value. This is an important distinction, because first, it means your cash value continues to accrue compound interest. When I studied finance in college a very important principle I was taught was opportunity cost; which stated simply means if you use your money to buy something, you cannot use that money to buy something else, it has been spent. This means for example, if you save money in an interest bearing savings account, your savings grows inside the account year after year. If you pull that savings out of the account to buy a car, it no longer grows in your savings account. Instead you used it to buy a car. There is an opportunity cost in buying the care. The opportunity cost is that your money is no longer earning interest and growing in the bank. The opportunity to earn interest was lost when you bought the car. That is called the opportunity cost of buying the car.
A simpler illustration of this principle is ordering food in a restaurant. If your parent takes you to a restaurant, where they serve both fish and steak, but you can only order one, either fish or steak, if you choose fish, you lost the opportunity to order steak. If you order steak, you lost the opportunity to order fish.
But when you look at the Whole Life insurance policy, you are saving money inside the policy, earning compound interest and it’s called your “cash value”. If you take out a policy loan, you are not borrowing FROM your cash value, you are borrowing AGAINST your cash value. So you can obtain cash to buy the car and your savings continues to grow. Thus you don’t have to choose between spending your savings and saving your savings, you can do both. This is one of the beautiful things about Whole Life Insurance. You can have both fish and steak. Enjoy your meal.
Remember knowledge is power, power brings wealth and wealth brings freedom.
✍🏼 by Shortsegments.