Nathan Morrisein suggested, “Every Time you borrow money, you’re robbing your future self.” In this post, I will help you understand something Nathan did not – the value of using your whole life insurance policy to pay yourself rather than rob your future self.
DO I HAVE TO PAYBACK POLICY LOANS?
The question I get asked the most is this, “Do I have to pay back my policy loans?” and the short answer is “No”. While this strikes many new self bankers as “too good to be true”, it is true but I’ll explain more of how it works to ease your mind.
If a picture is worth a thousand words, let’s draw one to explain the policy loan process. These are the details for the example we will create.
Premium Deposit: $10,000
Death Benefit: $100,000
Policy Loan: $(3,000)
Annual Interest at 5% – $150
When you take a policy loan, you are borrowing from the general fund of the insurance company and using your policy as collateral. You are not borrowing your specific policy funds. The balance of your policy remains in full (10,000 in our example) and you receive $3,000 from the general fund to use as you need.
The $3,000 that is loaned to you is a pre-payment of the death benefit. Here’s the picture:
If you have your graduation day or you die after the loan is accepted and it isn’t paid back, your death benefit of $100k will pay the loan off first. This leaves $97k to go to the policy’s beneficiary. It is worth noting that the beneficiaries also have whatever assets the $3k loan used to pay off as well.
It is a GOOD IDEA to pay back policy loans.
When you become your own banker, treat your bank the same as you would treat a conventional bank. If you borrowed money from a conventional bank, you would be expected to pay back the loan with interest. While paying back the loan to yourself is not required as long as you continue to pay your premium deposits, it is encouraged because this is more money for you to use in the future.
Questions to ask before paying your loan back:
- Do I still need the money? If you are still using the loan and don’t have the option to pay it back at the anniversary date, then don’t pay the loan back.
- Can I at least pay back the interest?
Picture from Above – If we assume an annual interest rate of 5%, the interest on the $3,000 policy loan would be $150. I encourage you to always pay the annual interest on any policy loan at every anniversary date of your policy. In order to keep these payments separate from premium deposits or loan repayments, write a separate check and note on the check “Policy Loan Interest”. In addition to paying yourself back, there can be tax benefits to paying this interest to yourself. Always check with your tax accountant, but in some cases, interest expense is tax deductible.
IF I’M BECOMING MY OWN BANK, DO I NEED CONVENTIONAL BANKING?
Yes, conventional banking is necessary for that — convenience. The convenience of access to your money – online banking, check writing, daily living. That being said, I suggest keeping only two – three months worth of overhead expenses within a conventional bank at a time. The biggest rule of money is to keep it moving. Whole life insurance policies allows you to do this. Once the balance within your conventional bank rises above three months of expenses, transfer that money into your bank either by paying more premium deposits, paying back loans or interest, or creating new branches of your bank (new policies). The more activity in your own bank, the more wealth you create for yourself and future generations of your family.
Key Points regarding Policy Loans:
- Payback of Loans are not required.
- Paying yourself back is ENCOURAGED when you have the funds to do so.
- Always pay the loan interest on the policy anniversary date.
- Keep your money moving.
- Always pay your premium deposits.
Three rules regarding creating wealth:
- Pay yourself first.
- Pay yourself with interest.
- Recycle (recapture) all money that is paid to others.