Congratulations! You are now ready to access the cash value in your life insurance policy and might want to organize your finances by separating your family finances from your policy finances. In this blogpost we will talk about everything you need to know about setting up a segregated account for your policy finances.
These are the four simple steps:
Step No.1
Is to set up a new checking account to separate from your family finances. With this segregated account, you have two options. You can do it at your regular bank, which has the benefit of quick and easy transfers that will usually take within a day or two between bank accounts. The second option is to go online and find a new bank that might pay a higher interest rate, but will take a few extra days to transfer money between the bank accounts. So keep that in mind.
Step No.2
Now that you have the new bank account set up, the second step is to request a policy loan. So however you do that with your insurance company, get the policy loan and deposit into the segregated checking account. From there, you will pay your major expenses. Whether it’s paying off a credit card, buying a new car, paying for a wedding, or going on vacation. You will pay right from that segregated checking account.
Step No.3
The key is to pay yourself back just as if you took a loan from the bank. You can set up an amortization schedule. Most of the time, our clients will decide with an amount that they could afford to pay back to the policy loan on a monthly basis. Some will decide to pay it back over two years or five years. That will determine how much they have to pay themselves back. Also, keep in mind that the deductions to pay back the policy loan will directly come from that segregated account. You will have to transfer money from your family checking account into the segregated account, back to the insurance company.
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Step No.4
Determine whether or not you want to pay yourself back at a higher interest rate than what the insurance company is going to charge you. Remember that if you pay yourself with a higher interest rate that is more than what the insurance company is requesting you to pay, the loan will be paid off earlier than the amortization schedule. Which means that you may have a Thirty Six months amortization schedule, but the policy loan will be paid back in just Thirty Four months. If that’s the case, we always recommend our clients to stay on schedule by transferring the monthly payment from your family finances account to your segregated account. Because that money that stays there is literally the profit that you made from yourself for doing self finance. Once those profits build up you can use it to the Paid Up Additions Rider or to purchase additional policies.
In his bestselling book, “Becoming Your Own Banker”, Nelson Nash made a great argument for paying a higher interest rate. He called it “Don’t Steal The Peas”. His analogy is that if you own a grocery store and you want to buy groceries or go grocery shopping in your own store then you may want to go out by the back door bypassing the cash register. He referred to that action as “stealing the peas”. He meant to say that you have to pay back the principal amount and interest. You wouldn’t want your wife to buy groceries at ShopRite, Price Shopper or other grocery stores. You have to shop at your own grocery store like a captive customer. Since you are shopping at your own store you should pay yourself a higher interest rate. That’s what he meant by not stealing the peas, pay yourself. Not only the interest rate, the insurance company is requesting, but a higher interest rate because you are a captive customer.
What are the benefits of paying yourself higher interest rates?
Every time you make a payment back to your policy, you’re increasing the amount of capital that’s available to you. Not to the credit cards nor to the finance companies. You have access to every dollar you are paying back to your policy loan. Now, keep in mind, setting up this segregated or separate bank account is completely an optional step. You do have the choice to put the policy loan proceeds into your family bank account, but there are some benefits in doing it this way with the segregated bank account. First and foremost, it just makes things easier to track. You can track your progress. You can witness or realize your profits from self-finance at the end of each month.
You earn interest every month instead of the bank, finance company or credit card company. You will be able to see how much they would be earning off of you.
Now let’s recap. The four steps to getting this set up for yourself.
Step One is to pick a bank and set up a segregated checking account.
Step Two is to request your policy loan and have it deposited directly into your segregated account.
Step Three is to create an amortization schedule based on your cashflow or your timeline.
Step Four is to track your progress by reviewing your bank statements every month.
Remember that it’s not how much money you make, it’s how much you keep that really matters and it is our mission to help as many families as possible to come up with strategies to maximize their policy loans. If you’re ready to get started and learn how to put this strategy to work for you, schedule your free strategy session today.
