First – a loan against your reinsurance is not a withdrawal. It’s a loan against your assets, not a distribution. You can set the terms of the loan yourself: Term length up to 7 years, Payment amount, interest rate (within reason).
It works very much like a 401(k) loan. You can also do interest only payments.
For example, a payment is coming due, but you would prefer to pay the principal in 6 months, so you only pay the interest on this payment. You can also pay the principal at the end of the loan.
One of the biggest benefits of the reinsurance loan is tax deferment. The dealership takes the loan out against assets in the reinsurance portfolio, not as a distribution, so there is no tax payment on a distribution.
Later, when the economy changes, or there is a good tax incentive, you have the option to satisfy the loan by converting it to a distribution when the tax climate is more favorable.
A few cons are:
- There must be an established portfolio with funds already available
- A dealer can only borrow up to 50% of the available funds
There are a few other variables to be aware of when considering a reinsurance loan, so feel free to reach out to the experts before you make a decision!
