Policy Loans | Tier 1 Capital, LLC

Setting Up A Segregated Account For Your Policy Loan

April 29, 2022

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.

Is Whole Life Insurance a Good Investment?: Internal Vs. External Rate of Return

April 15, 2022

You often hear that whole life insurance is a lousy investment and that’s kind of true in the sense that life insurance isn’t an investment. Investments inherently have risk and that’s not the case with the whole life insurance policy.

With the whole life insurance policy designed for cash accumulation, you could expect to earn anywhere between 3% and 5% over your lifetime – but understand that’s not how the policy starts off.

Starting a new life insurance policy is kind of like starting a business. If you were to start a business today, you wouldn’t expect to become profitable in the first year, the second year or even the third year – but usually from the fourth year, that business will become profitable and hopefully will continue to grow year over year. The same holds true with a whole life insurance policy designed for cash accumulation. In the first year, you might have access to 40% of what you pay in premium. In the second year, it might be 60% or 65%. In the third year, 90% or 95%. But from the fourth year on, you should be generating a profit year over year in that policy and it will only get better from that point forward because of the way the policy is designed.

Basically, for each dollar you pay in premium from the fourth year on, you could expect your cash value to increase by more than one dollar. As mentioned, life insurance isn’t an investment because there is no risk. Once that money is credited to your cash value, that value will never go down.

On a cumulative basis, we would expect the break-even point to be somewhere between year seven and year ten. For example, if you paid a hundred thousand dollars in premiums over 10 years, you would expect your cash value to be a hundred thousand dollars in those 10 years and maybe a little higher. After that, the cash value and the accumulation value will continue to grow year after year.

The key here is that the so-called financial experts will judge life insurance on those first 10 years and say it’s a lousy investment. But what they’re completely ignoring is the fact that you could still access that money through the loan option or the loan feature in the policy. Taking advantage of the loan provision can allow you to not only generate that internal rate of return, but to generate an external rate of return on your money. This can allow you to make all of your other savings and investments much more efficient. Keep this in mind: You have the internal rate of return – that isn’t going to be interrupted by accessing that cash using policy loans PLUS you’re able to put that money to work for you somewhere else and make an external rate of return on an actual investment. Once you make the money on your investment, you can cash out and repay your policy loan and realize your profit.

Can I use my policy in the early years – before the break-even point?

A lot of times people come to us with credit card debt and they’re paying a very high interest rate which is taking up a lot of their monthly cash flow. An example of how you could use your policy is to repay that credit card debt using a policy loan and then rebuild and replenish your cash values so that it is accessible again in the future. Basically, you could take a loan against your life insurance cash, pay that credit card off and then redirect the payments from your credit card to repay the policy loan until the loan is paid off. Not only do we have a lower interest rate, we also have control over that payment amount every month. If you run into cash problems, you could back off on that payment. But if you are cash flush, you could pay that debt off faster and you’re actually building an asset for yourself.

Another way that you could access that money either in the early stages of your policy or the late stages is to borrow against your cash value to make an investment whether that’s into stocks and bonds, crypto currency, gold, silver or real estate.

The key is using the cash value in your life insurance policy to make your other money substantially more efficient.

Only in a whole life insurance policy, you can have access to the cash values without draining the tank. Basically you’re able to continuously earn compound interest and access that money to make an investment that will potentially earn you a higher rate of return. You have the policy earning the 3% to 5% over your lifetime at the same time you also have the ability to earn a higher rate of return on investments like stocks or real estate. Whether it’s to make an investment or to pay off debt, the bottom line is that you’re making your money more efficient. Your money is working in more than one place at once. That makes your money more efficient and ultimately puts you in a stronger financial position.

What about getting a margin loan or borrowing against the equity of my real estate?

It is possible to access money from other sources like a home equity loan or a margin loan on your investment portfolio. However, whole life insurance is the only financial tool that allows you to access money and know for sure that you’re going to have a greater account value at the end of the year than you did in the previous year – when you take a loan against your life insurance cash value, the compounding of interest is never interrupted. Your policy continues to perform as if you had not accessed any money.

With a margin loan, the underlying investments might decline and you may have a margin call – once again putting further squeeze on your cash.

In real estate, the value of your real estate could appreciate or it could also depreciate, it depends on the market conditions. Also, with a real estate loan, you have a structured repayment versus with a policy loan where you can determine the payment terms in the sense that if you want to put $50 a month on the policy loan, you could do that. If you want to put $300 a month on the policy loan, you could do that. If you don’t want to put anything on the policy loan, you could do that as well. There’s no one telling you what the repayment schedule is.

Here’s another thing to consider. What if you just drain your savings to make the investment? What’s the difference there?

We had this situation with a client who started a policy. They had about $5,000 of cash in the policy. They coincidentally have a $3,500 credit card bill that’s due and they wanted to pay off the credit card. The husband wanted to borrow against the policy because he sort of understood the concept of leveraging life insurance and the power of using this method. The wife was a little hesitant and wanted to use money from their savings account instead of a policy loan. They had $20,000 in savings and she said, “Well, let’s just take $3,500 from the savings, drain down the tank. Then we could leave the money in the policy to use for our home improvements.” What they’re missing is the fact that before that transaction, they have access to $20,000 that they own and control. If they drain down the tank to the tune of $3,500, they don’t control $20,000. They only control $16,500 and they’re still earning the interest in the policy because they didn’t access the money. But if they don’t take the money out from the savings and they borrow against the policy, they will still control $20,000 and they will still earn interest on the $5,000 – even though they accessed $3,500 against the policy. That’s what we call opportunity cost. We don’t only consider the money that we’re using – we also consider what that money could have earned us had we invested that money.

Whether it’s to pay off debt or pay a lower interest rate against the policy versus credit cards or whether it’s to make an external investment by accessing the cash value in your life insurance. Life insurance could allow you to generate that external rate of return on investment opportunities and still guarantee that you’ll get the internal rate of return on your cash value that you have accumulated in the policy.

Remember, it’s not how much money you make, It’s how much money you keep that really matters.

If you like this post, don’t forget to leave us comments down below on what you think about this topic.

Want to learn more about this topic, check out our free web course to see how our process works. If you are ready to talk, feel free to schedule a free strategy session today to get started.

How do policy loans work?

February 15, 2021

“Think of this, what if you can guarantee that you will never lose any money ever again, would that be a good benefit to have?”

Anytime you have cash value in your life insurance policy, you have a contractual right that allows you to borrow against that cash value. Anytime you want. For whatever reason. Two reasons that we think make a lot of sense to borrow against your cash value are number one, to make a major capital purchase. Major capital purchases are things that you can’t pay in full using your regular monthly cashflow. And the second reason is to take advantage of an investment opportunity.

Let’s take a look at the mechanics of how a policy loan can work for a major capital purchase. As you pay your insurance premiums, three things increase your cash value, your death benefit and your access to capital. When you take a policy loan against your policy, you’re not taking money from your policy. It’s a collateralized loan, very similar to how you access equity in your home. You’re not taking money from your home. You’re putting a lien against your home and the same way you’re not taking money from your policy. You’re putting a lien against the cash value in your policy. As you make policy loan payments, you’re making the payments directly to the insurance company to decrease that lien on your cash value. This is going to free up cash that you can access again in the future.

Notice that your cash value continues to grow even while you have a loan against it. This is where you get to experience the miracle of uninterrupted compounding of interest, even while you’re using your money. It’s as if your money is in two places at once, because it literally is. Let’s face it. One of life’s greatest financial frustrations comes from the lack of access to capital when you need it most. We saw this a lot during the 2020 pandemic. If you’re a business owner and you’ve plowed all of your profits back into your business, you experienced the frustration of not having access to your capital or control of your money when you needed it most.

Let’s take a look at how policy loans could work to take advantage of investment or business opportunities. One main difference between a bank loan and a policy loan is that there are no restrictions for the purpose of the loan. There’s no income check. There’s no credit check and there’s no inventory check. Policy loans are collateralized against your cash value. Again, you’re not taking money from your policy, you’re placing a lien against your policy. Basically what this means is, if you die with a policy loan on your policy, your death benefit will be decreased dollar for dollar. For the amount of the outstanding loan. Loan payments are made directly to the insurance company to decrease that lien on your policy. But with every payment, your access to capital will increase.

Notice that the policy continues to grow even while you’re using your money because a policy loan is a contractual guarantee. You’re basically giving an order. You are telling the insurance company to go get you some money versus going to a bank and asking permission as a business owner. Would you rather give an order or have to ask for permission?

So let’s take a look at exactly how policy loans work. The first step is to build your cash value. After you have some cash value, you have options. One of those options is to tell the insurance company to distribute a loan to you, and they’ll place a lien against your cash value and distribute an interest-only loan. You could use that money to pay for a car, a wedding, an investment, whatever you want, you have the control of that money. Another thing you have control over is the repayment terms. You get to determine how much you pay back towards that loan. You can pay just the interest. You could pay more when your cashflow is flush and less when your cashflow is pinched, you have control.

We talked about policy loans and how you have use and control of your money, but there are so many additional benefits with cash value life insurance. Think of this, what if you can guarantee that you will never lose any money ever again, would that be a good benefit to have? What if, because you didn’t lose money, you had access to money so that you could take advantage of any stumbles, wonders or errors that the government and the markets make. What if you could earn uninterrupted compounding of interest on your money, even while you’re using it, would that be a good benefit to have? What if we can do all the things we just described and have reduced or eliminated taxes on our savings, would that be a good benefit to have? All of these benefits exist in cash value life insurance. There is no other financial product that offers all of the things that we just described.