Life Insurance Loans and Why We Use Them

Privatized Banking – Life Insurance Loans and Why We Use Them

Life insurance loans are one of the superpowers of the Infinite Banking Concept.  They give you ready access to capital at any time, for any reason.  These loans from life insurance policies make the cash value of specially-designed life insurance an ideal pool of capital for your investing strategy.  Life insurance policy loans provide the opportunity to earn uninterrupted compound interest and earn a return in two places at the same time.

However, many people encounter a mental hurdle when they consider using loans to fund their investments. They don’t want to pay to use their money.  And they’re concerned that infinite banking loan interest will eat into their returns when they put their capital to work. 

However, much financial fear is based in partial truth and lack of understanding of the full range of impacts of your decisions. 

And this isn’t your fault.  Most “financial education” is a spiffed-up sales pitch offered by “financial experts.”  Instead of helping you, it’s a one-way street, viewed through rose-colored glasses, to a particular financial product.  Meanwhile, you’re wondering if you will be convinced to buy something you don’t actually want or need. 

But, consider this, anything worth understanding has layers of complexity, and only those who pursue a comprehensive understanding will gain it.

This quote by Bryan Bloom strikes at the heart of the matter:

Why isn’t everyone doing this?  Everyone who understands, does.

– Bryan Bloom, Confessions of a CPA

When it comes to life insurance policy loans, a healthy dose of curiosity will help you gain an understanding of a financial process, principles, and truths that will give you advantages most people only dream of.

What We’ll Cover

In today’s conversation, we’ll answer your questions about life insurance policy loans and why we use them, including:

  1. What is the function of life insurance cash value in my financial life?
  2. How does life insurance increase my liquidity?
  3. What is a life insurance policy loan?
  4. What can I use a life insurance policy loan for?
  5. When investing, why would I use a life insurance policy loan instead of paying cash?
  6. How do I increase my Return on investment by using whole life insurance with my investments?
  7. Why would I pay interest to “use my own money”?
  8. Are there times that I should consider another loan with a better interest rate?

Packaging it all together, we’ll demonstrate why they increase returns on your investments..

Where Privatized Banking Fits into Your Cash Flow System

Privatized Banking

Life insurance policy loans are a part of Privatized Banking, just one step in the greater Cash Flow System.

Wedged between Stage 1 and 3, Privatized Banking fits into Stage 2, the canopy of protection in your financial life.  While protecting your personal economy from the risk of loss, it also helps you keep more of the money you make and amplifies your cash-flowing asset strategy, accelerating time and money freedom. 

The Function of Life Insurance Cash Value in Your Financial Life

Cash value is part of your savings, a place to store cash.  This is your stable, safe money that you save for emergencies and opportunities because it holds its value and provides accessibility.

The function is completely different from your investing.  With investments, you’re interested in returns.  When you invest, you want to grow your money, either through cash flow or by appreciation. 

But life insurance policies are not and never will be an investment.

While your life insurance policy offers growth, it’s primary benefits to you are the stability of value and ready access.

A Garage to Park Your Money

You could think of putting your money into life policies as parking your cars in the garage. 

Driving the cars is where you put them to work, and where all the risk happens. 

But no one drives their car 24/7.  Between driving excursions, you want a safe, reliable garage to park your car. 

The same goes for your money.  You need a safe, reliable place to park your capital between investments, where it also gets the most benefits.

When planning the trajectory of your financial life, the first question to ask yourself is this: where will you store your money?  The next question is: how will you access the money when you need it? 

How Life Insurance Increases Your Liquidity

Now that you’re determined to find the best place to store your money between investments, let’s evaluate how a life insurance policy increases your liquidity.

To further think this through, here’s a comparison of other savings vehicles you might consider. Note: most other financial products would negatively affect your liquidity and your ability to use your money.

Three Parts of a Whole Life Insurance Contract

There are three primary parts of the type of policy we use:

  • Premium Payments
  • Death Benefit
  • Cash Value

The premium is what you pay into the policy.  This is akin to the money you put into savings.

The death benefit is the insurance portion of the contract that is paid to your beneficiaries when you die.

The cash value is the portion of the death benefit that you can access during your lifetime. It could be compared to the account balance on a savings account.  This is the portion of the policy that we refer to as an emergency/opportunity fund because it’s the safe, liquid, and growing money you can use.

It is important to note that term life insurance does not provide the cash value needed. You will need a permanent life insurance policy, more specifically you will want whole life insurance.

The Liquidity of Life Insurance

When you put premium dollars into a specially-designed life insurance policy, you have access to high cash value right up front.  And we’re not talking about a little bit of money. 

you make the rules quote

In the first year of the policy, usually about 30 days after the check clears, you can access at least 50 – 60% of what you’ve paid in premiums.  Often, between years five and nine, you can access more than 100% of what you’ve paid in premiums.  After that, it continues to grow above your cost basis (total premiums paid in). *

When you own a permanent life policy, you have a growing pool of capital that you can use.

It’s almost easier to conceptualize what happens when you fund a life insurance policy by thinking of it this way: the money you put in grows, is available to you, and creates a death benefit.  In the early years, most of the internal costs are front-loaded, which is why you don’t have access to the full 100% until a few years later.

To access and use your cash value, you have a guaranteed loan provision.  This allows you to borrow from your policy an amount up to nearly all of your cash value. Using your insurance policy as collateral to obtain a whole life policy loan from the life insurance company.

And, your cash value is contractually guaranteed to never drop in value, so you’ll never have to worry about losing money.

There are no checkpoints, gates, bars, or denials on accessing your policy’s cash value.  The only limitation on how much capital you can get is how much you’ve put into the policy in the first place.

*Individual policies are based on age, gender, and habits.  Individual considerations may improve or delay the timeframe of your liquidity.

What Is A Life Insurance Loan?

Let’s look deeper at what a life insurance policy loan is, and why it’s a superior method of accessing capital.

Collateralizing Your Cash Value

When you access your cash value, you are taking a loan from the life insurance company, using your policy as collateral. 

When you take a loan, the life insurance company places a lien on a portion of your cash value equal to the loan amount.  That portion cannot be used as collateral until you start to pay back the loan.  As the loan is paid back, the lien is equivalently reduced.

Unlike a credit card or bank loans, there are no requirements. The payback schedule on your loan is entirely up to you. You can pay back as much as you want and when you want.

Rather than decreasing your total cash value, outstanding loans only reduce your available borrowing capacity until paid back. 

Total cash value – Current outstanding policy loans = Amount that can be collateralized

Life insurance loans merely reduce the amount that can be collateralized for another loan at the present time. 

The mechanics of this accessibility create its unique advantage.  Here are the implications and benefits to you:

1) You’re Using Other People’s Money (OPM)

You are not borrowing your cash value – you are borrowing against your life policy cash value.

Rather than using your own money, you’re gaining unfettered access to the life insurance company’s capital.  Your cash value stays intact, while you deploy other people’s money (OPM) in the ventures of your choosing.

2) You Earn Uninterrupted Compound Interest

Because your own money stays securely intact, at any point in time, with or without loans, your total cash value continues to rise steadily.  It does so by earning interest and dividends.

This means that, even when you use your money through policy loans, you earn interest at the same time.

Because your own money continues to grow, you leverage the power of uninterrupted compounding

3) You Recycle Your Cash

When you repay the loan, whether incrementally or all at once, you release the cash value to be used again. 

This capital access is similar to a HELOC.  With a HELOC, current balances are secured against the equity of the property and repaid balances free up the equity to collateralize another transaction.  The difference is that, with a HELOC, the underlying value of the property has the potential to fluctuate and even drop in value, while the underlying cash value in your policy will never go down in value.

Putting the same money to work over and over again is only possible if you maintain control of your capital.  You never give up your cash and put it into someone else’s hands.  Instead, it remains at your service, able to be collateralized over and over again.

This recycling provides for your money to multitask and increase its velocity. 

Think of it this way.  Within equal timeframes, if you could only use your money once, you’d need to get the highest return possible, say 20%.  What if instead, you used the same dollars over and over 20 times, earning 10% each time.  If every time you sent out the capital to work for you, it brought back a harvest, you would have created a 200% return.  This is the power of velocity.

Why “Paying Interest to Use My Own Money” Is a Myth

life insurance loans

This statement comes from a slight misunderstanding. With a life insurance loan, you’re not using your own money. Rather, you’re borrowing the life insurance company’s funds.  When you use the life insurance company’s money, you pay interest to them for the use of their capital. The interest accrues, adding to the loan balance, if not paid back.

The primary objection to using policy loans is usually some form of the question, why would I pay interest to use my own money?

Remember the principle:

All capital has a cost.

Don’t try to look for capital that has no cost, because it does not exist. 

Using your own cash costs what you can no longer earn on that money. 

Using someone else’s requires the payment of interest. 

Life Insurance Policy Loans Allow You to Continue Earning Interest

The value of using policy loans is not that it removes the cost of capital.  Instead, it mitigates the cost by allowing you to continue earning interest at the same time.  This minimizes your overall cost of capital and gains you the upper hand of being the bank.

The advantage is the ability to control capital and use arbitrage to increase your returns.  It’s valuable to look at the sum total of the whole picture, not just the cost of the loan.

The Value of Using Life Insurance Loans to Invest, Instead of Just Paying Cash

Another common question that arises out of grappling with the idea of using policy loans to invest is this: why would I use a loan from a life insurance policy to invest instead of just paying cash?  Wouldn’t paying interest to repay the loan reduce my earnings?

The answer requires a further discussion of what happens when you use a policy loan. 

Surprisingly, you’ll discover that using a policy loan to fund an investment not only doesn’t cut into your returns, but far to the contrary.  Instead, using this loan boosts your investment earnings.

Fundamentally, here’s the difference:

When You Pay Cash, You Trade Returns

While paying cash may seem more straightforward and direct, it comes with a significant disadvantage.  When you use your cash, you can no longer earn a return on that money in the original account. 

When you interrupt the compounding of your money, you stop it’s earning power.  You trade it’s return for the return that you can get in an outside investment.

Therefore, the opportunity cost of using your own cash is all the future money you could have earned in the original account, had you let it continue to earn compound interest. 

When You Use a Life Insurance Loan, You Stack Returns

But when you use a life insurance loan, instead of trading one return for another, you get both, stacking the two returns on top of each other.

You continue earning the return in the life insurance, PLUS you earn a return in your outside investment. 

You don’t have to accept the false dichotomy that you must give up one return to get another.  This recognition is the key to understanding the power possible to you with Privatized Banking.

Increasing Your Return on Investment by Using Life Insurance Loans

Here’s a closer look at how life insurance loansincrease your ROI through stacking your returns.

Life Insurance Loans and Why We Use Them

Imagine you started by putting $45K cash aside for 7 years.  In the third year, you buy a $100K property that will cash flow $1000/month. Let’s compare using policy loans vs. cash to see how a policy loan increases your returns. 

We’ll discuss an overview here, but you can get a full explanation in our Privatized Banking Quick and Easy Guide.

Paying Cash to Fund Your Investment

Your first 7 years of deposits of $45,000 each year are made into a bank savings account that earns 1%.  Because the savings account is taxable, it’s subject to your 33% tax bracket, reducing your after-tax growth rate to 0.67%.

In year 3, you take $100K of cash out of the account, to purchase the investment property.

Since you paid cash, you own the property free and clear, so you collect the full $1K in rent each month.  Over the next 30 years, you will receive $360K in cash flow from the property. 

If you deposit the $1K back into the same savings account and leave it there without touching it again, your ending account balance after another 30 years from the property purchase date (37 years from your initial funding year) will be $661,425.83. Adding the property value of $242,726, you’d have $904,151,83. We then subtract the $315,000 cash put into your savings account. This leaves you with a profit of $589,151.83.

Using Life Insurance Cash Value as a Private Reserve to Fund Your Investment

In contrast, instead of placing $45,000 each year into bank savings, imagine you put the same funds into a cash value life insurance policy instead.  (An actual life insurance illustration for a 47-year-old man in average health was used for this example.)

Accounting for Loan Repayment

As with the cash-only example, in year 3, you use $100K by borrowing against your cash value with a $100K life insurance loan. Since you are your own banker, you accept the terms of 5% interest. This generates a monthly payment of $536.82 and you’ll pay your loan over 30 years.

Your $1K monthly rental income is reduced by the outstanding loan payment of $536.82/month, leaving you with $463.18/month. This cashflow will be redirected into your Privatized Banking system.

Summing all 30 years of rental payments, less loan payments, you’ll receive a net of $166,745 in cash flow over the next 30 years, after which, the loan will be fully repaid. 

Yes, this is an amount significantly less than the $360K net cash flow from the property if you paid cash.  This is where most people mentally stop with this calculation, but it’s misleading because it doesn’t tell the whole story. 

Earning in Two Places at the Same Time

Remember, with the life insurance loan option, you are gaining returns in two places, not just one.  Now we need to look ahead to our policy’s cash value at the end of the measurement period. 

Here’s what we find: 30 years after the property was purchased (the 37th year of the policy), the cash value of the life insurance policy, including interest and dividends amounts to $1,273,500.  Adding the property value of $242,726, you’d have $1,516,226. We then subtract the $315,000 cash put into your Infinite Banking System. This leaves you with a profit of $1,201,226. Compared with the $589,151.83 profit in the cash-only example.

Paying Cash vs. Life Insurance Loans

The Undeniable Advantage of Using Privatized Banking with Life Insurance Loans

Using a life insurance policy loan more than doubled the profits at the end of the measurement period.  This is because, with life insurance, you earned a higher return, in a non-taxable environment, and didn’t reset the compounding on your money. AND you also created a death benefit, a side benefit that wasn’t even considered in the cash-only example.

Therefore, paying interest to use a policy loan doesn’t cut into your earnings.  Thinking so stems from viewing just part of the scenario.  When you look at the full picture, the end result of this example is that even though you paid interest to access your capital through a loan, you more than doubled your ending balance.

Again, the reason life insurance loans work so well to accelerate your returns is that you aren’t trading returns.  Instead, you’re stacking returns. You’re earning uninterrupted compound interest in the policy while also earning an external return at the same time.

What Can You Use a Life Insurance Policy Loan For?

If it’s this good, what exactly can you use a life insurance policy loan for?  The sky’s the limit here too!

When you have cash value, you are the only person who determines what it will be used for.  There’s no third party standing over your shoulder to dictate the terms of use. 

It can finance the buyout of another business, fund a marketing campaign, or even cover expenses during months of tight income.  It can pay for a medical emergency or a new car. You could use it to make a down payment on a house, pay off loans to free up the monthly payments, or buy business equipment.

Obtaining the Best Loan with the Best Interest Rate

Now, just because you have life insurance cash value, doesn’t mean you’ll want to use this as your sole capital source. 

There are times you may want to get a bank loan with a better interest rate.  In fact, banks will often collateralize a policy’s cash value (not the death benefit) and offer a loan at their going rate for secured loans.

Or, sometimes it makes sense to get a bank loan without collateralizing your policy.

But, if you know your cash can earn 3 – 5% in your policy when your money is at rest, parked in the garage, why would you pay cash and give up the opportunity to earn that return?

The main priority is having control of your capital, which gives you peace of mind and options to make the best decisions.

In Summary

Today, we’ve discussed why you want to use life insurance loans and what they are. 

The number one reason to use a policy loan is that it allows you to maintain control of your capital and earn uninterrupted compound interest.

Cash value life insurance is a funding source that provides ready access to capital by offering liquidity through the guaranteed loan provision.

Finally, whole life insurance increase returns on your investments by giving you an external return on outside investments, in addition to the internal rate of return that you earn inside the policy.

Packaging together the control, guaranteed loan provision, collateralization, uninterrupted compound growth, and the ability to earn returns in two places at the same time, life insurance policy loans give you a multi-dimensional access to capital that you won’t find anywhere else.

Your Decision Point

Now, it’s up to you to decide how to proceed. The only limit on your access to capital through life insurance loans is how much you put in in the first place.

For more information on whole life insurance policies, get our free Quick & Easy Privatized Banking Guide.

If you would like to implement life insurance and Privatized Banking in your own life, talk to us about how it would work for you.

Book a strategy call to find out how, and also get the one thing you should be doing today to optimize your personal economy and accelerate time and money freedom. 

Rachel Marshall

Rachel Marshall is a devoted wife and nurturing mother to three wonderful children. Rachel is a speaker, coach, and the author of Seven Generations Legacy™, passionate about helping enterprising families unlock their true potential and live into the multi-generational legacy they are destined for. After a near-death experience, she developed a deep understanding of the significance of recognizing and embracing one's unique legacy As Co-Founder and Chief Financial Educator of The Money Advantage, Rachel Marshall is renowned for her ability to make money simple, fun, and doable. She empowers her clients to build sustainable multi-generational wealth and create a legacy that extends far beyond mere financial success. Rachel's expertise lies in helping wealth creators remove the fear of money ruining their children, give instructions for stewarding family money, teach financial stewardship and create perpetual wealth through family banking, and save time coordinating family finances. Rachel co-hosts The Money Advantage podcast, a highly popular show that delves into business and personal finance, including how to effectively manage finances, protect wealth, and generate sustainable cash flow. Rachel's engaging teaching style and practical advice have made her a trusted source of financial wisdom for her listeners.
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  1. Shawn Thorpe on October 27, 2019 at 8:15 pm


    I have atartwd the insurance process and need financial institutions that fund in the privitized banking area.