Understanding that whole life insurance is not about the death benefit, it’s about the cash value.

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I would like to focus on this integral and central component of using Whole Life Insurance as your personal decentralized credit debt facility.

What is 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, but currently the national average for Mutual life insurance companies is around 4%, with the range being 4-6%.

Do I pay taxes on this savings account?
No, the United States Taxation Department, the IRS specifically excludes this savings account and the compound interest earned, from taxes in its tax code.

May I borrow this money while keeping the policy active?
No. But You can borrow against it. While the amount of your cash value in the policy determines how much you can borrow from the insurance company, you are not actually borrowing your money with policy loans. You are borrowing money from the insurance company general funds.

Why would I want to borrow against my life insurance cash value?
It’s a cheap source of money for investments, purchases, school, unexpected expenses or it can be part of an overall financial plan.

Do I pay interest on the money I borrow?
Yes.

Do I pay a higher interest rate on the money I borrow, then the insurance company pays on my cash value?
Yes.

How can that be a good deal for me?
Two ways:
First interest rate; The rate the insurance company charges you, on a policy loan, should be less then what your bank charges you for the same loan, or you should take the loan from your bank. Most bank consumer loans are 12% to 30% and compound interest. So a policy loan of 6-8% is a better deal based on the interest rate alone.
Second; the policy loan from the insurance company is simple interest and the majority of consumer loans are compound interest. So the interest is compounded daily, so you pay more interest.

Can policy loans can be used to pay down my consumer loan debt?
Yes.

How does this work?
Let’s look at an example: If you have a $2400 credit card balance, which carries a 12% interest rate, which is compound interest. And suppose you can only afford to pay the minimum payment each month of $100.00, of which $50 was interest, so it takes you 48 months to pay it off, for a total of $4800.00 dollars. You can borrow for example $2400.00 from a policy loan at 6% simple interest to payoff a $2400 credit card balance, and now you pay that $100 dollar payment to yourself. You still pay interest, but one half the rate and simple interest, not compound interest, so more of your payment goes to principle, not interest and the debt is retired sooner.

It seems like I am just replacing one debt with another. How does this help me?
You are correct, you are replacing one debt with another. But because you are replacing a 12% interest debt with a 6% interest debt, cutting your interest in half, you are reducing each months interest payment, while simultaneously increasing each months principle payment. This allows you to payoff the debt faster. !Additionally because you are paying less interest monthly on your consumer debt, you are spending less of your monthly paycheck on interest, so in a sense this strategy gets you that money you would have spent back into your wallet. You are paying yourself the difference. If you adjust your thinking to understand money saved on interest payments is the same as money earned because you have more cash to invest or spend, you are beginning to understand how this system gets you financial freedom.
The next important economic concept is opportunity cost.

Opportunity Cost

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 car. 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. Thus the opportunity cost of ordering steak is that you don’t get to order fish. The great thing about whole life insurance is that it is an investment with no opportunity cost. It allows you to save and buy at the same time. You see with whole life insurance you can save your money inside the cash value of your life insurance policy and borrow against it for a loan, which you could use to buy things or invest in something. You can use your money for two things! Simply put, it allows you to order both steak and fish.

This is the beauty of this. After about one year you deposit and borrow against what you deposit. You slowly build up this credit facility, so your loans get larger and larger. But the best part of it is your cash value keeps growing tax free and you keep paying interest to yourself.

Focus, understand and then build your bank.

@shortsegments

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