Over
the years one of the most frequently asked questions I seem to get from my
Infinite Banking clients is how they can pay extra interest on their policy
loans the way Nelson Nash, the pioneer behind the Infinite Banking idea,
teaches it in his best-selling book “Becoming Your Own Banker”.
It’s
a great question because Nelson Nash, the creator of the Infinite Banking
Concept (IBC), had a unique way of teaching which a lot of the time incorporated
euphemisms.
First,
what’s a Euphemism? It’s expression used
as a substitute for the actual thing.
For example, one might say “he passed away” instead of “he died”.
“Paying
extra interest” is the euphemism Nelson used to explain how to re-capitalize Whole
Life policies when loans were taken.
“Paying
extra interest” in effect means sending larger loan repayments to accelerate
the payoff of a policy loan.
One
of the unique things about policy loans is that 100% of the loan repayment
automatically reduces the balance of a loan. If you have a $10,000 policy loan from your
IBC policy and submit a loan repayment for $500, all $500 is applied towards
the $10,000 loan balance.
Not
one cent first goes towards interest which is what you will be familiar with when
borrowing money from a bank.
In
contrast, a bank loan will demand a payment schedule where the banks charge you
interest first and then applies the rest towards the principal. In this
way traditional banks collect more interest upfront and delays the payoff of
loans for as long as possible in order to maximize the interest collected.
This
is why Nelson talked a lot about Volume of Interest being more important than
the Interest Rate. Check out a mortgage for the best example. A
“homeowner” might have a 4% fixed rate mortgage for 30 years, but are they
actually paying 4%?
Far
from it! We all probably realize the volume of interest on a mortgage is
over 80% in the first 10 years. If a person keeps and pays off the
mortgage in 30 years, the volume of interest will eventually come down to the
mid-30% range.
Did
the homeowner ever pay 4%... at any point? They actually paid 1/3 of
their mortgage in interest over 30 years.
It’s
financial deceit at the highest level. And banks will do this with car
loans, credit cards, personal loans, etc. We should not think of banks
as friendly institutions which is what Nelson really wanted you to know!
Banks want a pound of flesh and they do a masterful job of drawing out the interest
on loans for as long as possible.
Understanding
Volume of Interest is critical to your financial base of knowledge but
unfortunately consumers are fixated on interest rate.
With
IBC, the policy loans from Whole Life policies have a true Volume of Interest
of 5% (the average borrowing rate from IBC approved life insurance companies) because
it is a simple interest loan. Every dollar repaid goes towards the
balance with interest assessed at 5% at the end of the policy year, not upfront
and certainly not compounding like a bank loan.
So
if you decide to re-pay the policy loan on an 8% schedule, you’ll pay off the
policy loan sooner. This is good because it recapitalizes the policy
making more cash value available sooner for the next use. This is the
first and most common way to “pay extra interest.”
Eventually
when the loan is fully paid, you’ll have a good problem though. You’re
accustomed to making a loan repayment each month but now with no more loan
balance, you have that extra cash flow from the 8% schedule of payments to do
something with.
This
is where Nelson talks about “Overcoming Parkinson’s Law.”
Simply
put, most people will use extra cash flow to go buy something they don’t
actually need. Instead this extra cash flow should go back to the
insurance company but now as premium to purchase Paid-Up Additions (PUA)
rider.
PUA’s
turbo-charge the cash value right away. The structure and use of this PUA
rider is what sets an IBC Whole Life policy apart from any other type of
permanent life policy.
The
other way to “Pay extra interest” is to break up the loan repayment into 2
parts:
- Schedule a loan repayment for 5% (you always decide the
time period… for example 5% over 12 months or maybe 60 months, etc., you decide
based on your cashflow!)
- Any amount “extra”, you send a separate check to be
applied towards the PUA rider.
Either
way, you will accomplish “paying extra interest” which essentially is Nelson’s
way of instructing you to be a disciplined saver and grow your wealth in the
smartest place possible.
Benefits of IBC:
·
Safe from market losses
· Available for any reason (investments
or debt acceleration)
·
Always growing uninterrupted even
with loans
·
Policy Loans are Tax-Free
·
Additional death benefit protection
for loved ones
·
Shielded for college aid formulas
·
Protected from creditors/lawsuits
(check your state)
Need
a review of your policy or have additional questions? Perhaps you’re ready for another Infinite
Banking policy? Many of my clients,
including myself, have multiple IBC policies.
Schedule
time to connect here: www.IBC.guru
Thank
you,
John A. Montoya
JLM Wealth Strategies, Inc.
Bank On Yourself® Authorized Professional
IBC® Authorized Practitioner
CA Life#0C42222
