Monday, August 26, 2019

“Paying Extra Interest” on Life Insurance Policy Loans (Infinite Banking Concept)

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:

  1. 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!)
  2. 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:

Thank you,

John A. Montoya
JLM Wealth Strategies, Inc.
Bank On Yourself® Authorized Professional
IBC® Authorized Practitioner
CA Life#0C42222