Borrowing Against Life Insurance: Why It Pays to Become Your Own Banker

“YOU ‘FINANCE’ everything you buy. You either pay interest to someone else or you give up interest you could have earned.”
-R. Nelson Nash, Becoming Your Own Banker

infinite-banking-exampleThere is an idea called the Infinite Banking Concept (it goes by other names, too, such as Privatized Banking, Family Banking, Circle of Wealth, Bank on Yourself) that claims to help people purchase the big-ticket items they need without sacrificing wealth-building at the same time. Infinite Banking uses dividend-paying or participating whole life insurance, which is greatly misunderstood by many.

Today, we’d like to illustrate how this strategy works using a less-controversial asset: a home. We also include a link to a video that gives an Infinite Banking example of borrowing against cash value to purchase cars vs. paying cash.

Understanding How Whole Life Policy Loans Can Accelerate Wealth-Building

Two weeks ago, our article “Should You Borrow Against Your Cash Value or Withdraw It?” began to examine some of the pros and cons of borrowing against whole life insurance vs. simply withdrawing it. In that post we said,

We are trained to measure interest paid on debts, but what about interest not earned when people save in a bank and pay cash, rather than storing that money where it can grow? This is your opportunity cost, which is every bit as important to measure as the interest you’re paying (if not more so). We either “pay up or pass up” interest, and it is critical to have MORE MONEY working for you than less money, even if it creates temporary debts in the process.

This week, we continue the discussion with a detailed illustration of how cash value gets more money working for you. Consider the following example:

A house functions similarly, in some ways, to your cash value. If you own a home for 25, 30, or 40 years, its value will grow significantly over time.

Even at a modest 4.5% growth rate (a rate that reflects the growth of many whole life cash value accounts as well as historical real estate gains), the value of a home will triple in 25 years! Here we show on the Truth Concepts Calculators how a $300k home will appreciate into a $901k home with a growth rate of 4.5% per year:

TC-home-appreciation-1.png

And a chart from the Truth Concepts Cash Flow calculator (which shows the gain each year):

TC-asset-appreciation-2.png

If you have a $300,000 home, and you borrow $200,000 against it, the home will still appreciate (or depreciate) according to the market. Your mortgage will not stop the home from appreciating into a $900k+ home, given enough time and the right market conditions.

Borrowing against your home lowers your usable EQUITY, but it does not affect the VALUE of the underlying asset. In other words, a loan against the property does not lower the homes market value, but it will affect your ability to access the equity or further collateralize the asset.

Just like a home with a mortgage, a policy loan decreases your “equity,” but the overall asset value continues to grow, unaffected by any loans against it. As with real estate, you can borrow against your cash value without compromising the value of the underlying investment. Like a mortgage, the cash value account acts as collateral when you take a policy loan.

Borrowing Against vs. Withdrawing from Cash Value

A policy loan is like a simple, temporary “mortgage” against your cash value. On the other hand, withdrawing cash value is essentially selling or liquidating that portion of the asset. In real estate terms, withdrawal would be like sub-dividing your property and selling a portion of it. You no longer have that portion of the asset, instead, you have the cash.

Likewise, while you can purchase new premiums (or properties), you can’t “put cash back in” once withdrawn. (It’s just the rules of insurance.) Like a piece of physical property, you no longer have use of the part you have liquidated.

Real estate and cash value share an important characteristic:

Both keep growing in value even when they are borrowed against.

In the case of real estate, it is not unusual for the value of a property to actually grow FASTER than the interest on the debt against it! Long-term homeowners often get back every penny they paid into their mortgage when a home sells. They have virtually lived in the home for free!

How is that possible? When every new home buyer signs their escrow papers, the scariest document is their “TIL,” or Truth in Lending disclosure. Their TIL may disclose that they will pay $518,013 over 30 years for the $240k mortgage on their $300,000 house with a 6% interest mortgage.  Add insurance and taxes, and you can add another hundred or two hundred thousand!

“Yikes!” thinks the buyer, “That’s a LOT of money!”

But 30 years later, even at a conservative 4.5% annual gain in value (4.5% is about the historical average for real estate in average non-bubble periods, and a rate that reflects what many policy owners earn on their cash value), this home they bought for $300k is now worth over $1.1 million. From 300k to 1.1 million!

This is not pie-in-the-sky, this is a phenomenon that repeats itself again and again and again.

Research the purchase histories of million dollar homes that are 30+ years old, you’ll see that they almost all started below the $300,000 mark. And many people who have owned several homes over their lifetime will tell you they would be much wealthier now had they found a way to hang onto the homes they used to own rather than selling them!

However, there is risk and uncertainty with real estate, as well as taxes, insurance, maintenance and other costs.

Cash value, on the other hand, is a low-maintenance asset that does not require work to maintain, and is not at risk of losing value when the market gets moody. But just like real estate, you can borrow against it while the asset grows. With regular (or lump sum) payments, your policy loans will eventually disappear, while your cash value continues to grow.

And here’s where it gets really interesting:

Just as the example above with real estate, consider how the growth of your cash value may be greater than the cost of your loan.

What does this mean for you? Just like a house can be “free” after 30 years because the appreciation exceeded the costs, so in a whole life policy, the costs of car purchases or even college educations are eventually typically exceeded by the growth of the cash value over time.

It may sound “too good to be true,” but as with real estate, it’s simply the way it works, again and again and again. In a properly set-up whole life policy (with the right PUA or paid-up additions rider to accelerate your cash value), it is typical to experience internal rates of return around 4.5%, depending on your health, age, and other factors.

(By the way, we do NOT recommend equity-indexed insurance products or ANY type of permanent insurance aside from whole life with a paid-up addition rider… equity-indexed insurance products are NOT safe to use in such ways as we are discussing here.)

While 4.5% may not sound like a “competitive rate” compared to typically-quoted investment returns (certainly nothing like some financial experts promise you’ll earn in the stock market, while they put their money elsewhere), it blows away any other risk-free account where you can:

  • store money safely
  • grow it tax-deferred
  • borrow against it at will, and
  • gain a death benefit, additionally.

When you keep growing your account by paying additional premiums, your cash value becomes not only a safe haven to store cash, but a dividend-producing asset that can grow faster than the interest on the loans you take against it!

By NOT withdrawing money when you need a car or a new roof, but by taking policy loans instead, your cash value acts like a home you keep for a decade or more. It keeps growing while you can leverage against it safely, securely, and easily. Best yet, you can “earn back” the interest you pay – and then some!

Click to see a peek-behind-the-curtain Infinite Banking example of how saving and paying CASH for vehicles costs MORE than borrowing against life insurance cash value to purchase the same vehicles! (This is a 9-minute tutorial Todd Langford did for Truth Concepts software for financial advisors.)

Additionally, the value of the underlying cash value asset eliminates risk typically associated with “borrowing” or “taking out a loan.” In cases where the policy owner for some reason is NOT able to pay off their loan out of their income, they simply paid for it with the cash value that served as the loan’s collateral.

In other words, doing a withdrawal remains an option, even after a policy loan is in place, should life not go according to plans.

Perhaps you’re beginning of understand the flexibility of whole life insurance and cash value policy loans…

Building Wealth 101 with the Infinite Banking Concept

The key that makes Infinite Banking and other similar concepts so powerful is this: borrowing against your own cash value asset keeps you SAVING and building wealth rather than saving cash temporarily in a bank account (education account, etc.) – again and again – only to spend it, then start from scratch again. If you focus only on eliminating or avoiding debt, you will actually slow down your wealth-building!

Robert Kiyosaki is known for emphasizing the strategy of buying income-producing assets. (We agree, and have encouraged clients in some situations to leverage cash value to purchase cash-flowing assets, such as excellent rental properties.)

With insurance banking strategies, the emphasis is on BUILDING a dividend-producing asset. The principles are the same, we are simply utilizing a very reliable, stable asset class that has proven itself reliable through every turn of the market.

Don’t just avoid debt and end up with empty pockets – build an asset you can use again and again!

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11 Responses to Borrowing Against Life Insurance: Why It Pays to Become Your Own Banker

  1. Pingback: Kim Butler: How I Discovered Infinite Banking | Partners for Prosperity

  2. Mark Proell says:

    Good Lesson if your young and investing in your first home. But I’m way past owning another home. Whole Life sounds good but I am not sure why I would to borrow against it…Mark

  3. Kate4Kim@P4P says:

    Some people never do borrow against it – they just use it as their primary savings vehicle. Others borrow to eliminate higher-interest debt (their own or perhaps a family member), make an investment (such as a rental house that is proven to generate cash flow), or for an emergency that goes beyond what their checking account can handle. Some people do not borrow against it from the insurance company, but use it as collateral so they can get very low-interest car loans (for instance) from their bank. It is certainly not necessary to borrow against cash value, and any borrowing should be carefully considered.

  4. Mike says:

    If I were to take out a loan against my policy cash value, and then decide to pay myself a high interest-rate like 8 to 10%, this would theoretically leave me with more total cash value. Wouldn’t I be in danger of exceeding the MEC line?

  5. Kate4Kim@P4P says:

    Great question, Mike! Yes, you could be in danger, and you’ll want to check with your insurance company each year, as each policy has a specific MEC limit and it can change each year. They’ll give you a specific answer. It will depend on how the policy was set up, how much you have already put in in terms of PUAs (paid-up additions), and other factors. This is a reason why some people start 3rd or 4th policies – when they get maxed out on PUAs and want to store more cash. They can put the PUAs into policy #2 even if the loan was from policy #1.

  6. Pingback: Life Insurance for Children and Grandchildren? The Surprising Benefits | Partners for ProsperityPartners for Prosperity

  7. don beamon says:

    If I were to take out a loan against my policy cash value, and then decide to pay myself a high interest-rate like 8 to 10%, this would theoretically leave me with more total cash value. Wouldn’t I be in danger of exceeding the MEC line?”

    How can he ‘ pay himself ‘ when the interest goes back to the insurance co..??

  8. Kate4Kim@P4P says:

    So sorry Don, I saw your quote of the other comment and didn’t realize at first that you had left a new question.

    You are partially correct, and we should have clarified the semantics. What a lot of people do is to pay the policy loan back “as if” they were paying back a higher interest loan with higher payments. When that is done, the policy loan is paid back more quickly (the interest and principle, which goes to the insurance company), and then any difference – any payments made “over and above” – can be PUA’s (paid-up additions) that become added cash value (and also increase death benefit).

    Some people use the language of “being an honest banker” and paying yourself the interest that you would have paid the bank. It’s really just a way to think about how to motivate yourself to pay back the loan faster and save more. You are correct that the loans are from (and paid back to) the insurance company, although people doing this also build their own savings (cash value) that generates dividends and can be leveraged in the future, so there is definitely an advantage to the policyholder. When a policyholder pays the loan back “as if” it’s at a higher interest rate, they eliminate their interest payments and get access to their money again faster. And they end up with more cash value as before, since additional payment amounts (as PUAs) go straight to cash value and add to savings.

  9. Velva says:

    It’s remarkable to visit this web site and reading the
    views of all colleagues regarding this article, while I am
    also eager of getting experience.

  10. Tom says:

    Great concept. I have 1 BIG question. All of this depends on the strength and solvency of the insurance company. Remember E.F. Hutton? None of this is guaranteed by anything. How does one determine the best company to go with?

  11. Kim Butler Kim Butler says:

    You’ll typically want to start with a mutual company which is focused only on its policy holders since there are no stock holders. Then pick one that is at least 100 years old and has good ratings from AM Best, Moody’s, and Standard and Poor’s. After that make sure you are using whole life not universal life or any other hybrids. At that point you’ve narrowed it down to around 20 companies and any of them will be just fine. Whole life and the paid up additions rider have been around for so long it won’t matter which of the 20 companies or which exact whole life product you pick.

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