(From the IBC Mailbag - below is an email exchange from an existing client with policies on every member of the family. I've consolidated my answers into a more readable format.)
Hi John, we have reached the seventh year of funding our original policies. Now I would like to explore the various ways to use the policies as we go forward. I have been re-reading R. Nelson Nash's book "Becoming Your Own Banker". Many of his examples feature much longer time frames than we are currently at, and we have no current cash needs.
The main options I see are:
Use dividends to pay premiums (although I have said we do not want to do this, I want to understand the math)
This is called an offset of premium. First the dividends would be used to offset the premium. If dividends do not completely cover the premium, then you could cover the difference or the death benefit could also be reduced to cover the shortfall.
Borrow cash for expenses we would normally finance, such as cars etc.
My rule of thumb: Always shop for the money first. If you can obtain lower financing and the monthly payments fit in your cashflow, choose the lower traditional financing and keep cash value in the policy available for investment purposes. Always shop for the money first.
Borrow cash for investment purposes, like the equipment leasing example.
This is the best use for cash values (assuming a person doesn’t have any high interest debt). IBC Whole Life policies are what I call money multipliers because they allow the safest form leverage a person can get anywhere. Policy owners can’t be turned down for a loan or have their cash reserves frozen, repayments are unscheduled. Safe leverage allows for money to work in two places instead of one hence money multiplier.
Borrow cash to pay off our mortgage.
This is my least favorite option because mortgages at today’s rates are ridiculously cheap and locked for up to 30 years. The dollar is purposely designed to devalue over time so if there is one benefit to inflation, this is it. That said, everybody’s situation is different and if paying off the remainder of mortgage frees up additional cash flow to use in retirement, then that makes sense. I’m just in favorite of it if the mortgage is relatively newer and there is strong cash flow and a very healthy balance sheet of assets.
Common Income Options With Whole Life.
- Withdraw dividends for income: Nelson used to tell the story of how withdrew dividends from his first whole life policy while he was working and then later regretted it. This is because those dividends when re-invested helped compound both the cash value and the death benefit. In retirement, however, different story. Withdrawing dividends IS an option to consider to supplement income.
- Another option is to withdraw cash values up to your contribution basis in the policy (non-taxable), and then take loans (also non-taxable) to continue supplementing income in retirement.
Other Income Options (especially if you have 401k/IRA retirement accounts)
- Leverage the death benefit of a whole life policy to buy an income producing annuity from a 401k/IRA account. 401k/IRA’s are supposed to provide income via withdrawals in retirement but the problem is risk and longevity. Pull out too much too soon and/or the market has a major correction, there will be little left to withdraw in later years. The right type of annuities can provide up to a 50% increase in income over a 3-4% 401k/IRA withdrawal strategy and the annuity income is also guaranteed for life. The permanent death benefit of the Whole Life policy provides the replacement of any funds put into the annuity from the 401k/IRA.
- Volatility Buffer Strategy: Don’t buy the annuity, keep money in the 401k/IRA invested in the market. When the market loses money, do not withdraw from 401k/IRA retirement accounts. Instead withdraw/policy loan from Whole Life policy. This allows the market based money to recover from the prior year losses without depleting the accounts further during a down year. In this strategy, 401k/IRA (market based assets) will last longer.
Use cash value to backstop self-insuring for collision & comprehensive coverage on our vehicles.
I’ve been doing this for a long time. I only pay for liability insurance because I have the cash values to replace my car if it was totaled. The excess savings increases my cash flow and that positive cash flow feeds more premium.
If you have an interest in learning how Infinite Banking could benefit you and your family, please reach out to me here: www.IBC.guru
Thank you,
John Montoya
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