My name is Austin Williams. I'm a wealth coach here at Better Wealth, and today we're going to be looking at a very singular topic, and that topic is the effect of taking policy loans on your life insurance policy. There's quite a bit of misinformation in the space, and I wanted to make a very numbers-oriented video to show once and for all what happens when you take a policy loan and how it gets paid back and then what the effect on your policy is. Now, The main central question that I'm trying to answer here is, do you pay interest to yourself? Now, if you haven't heard of that question before, this is something that gets raised up a lot in space. Obviously, this strategy was invented by R. Nelson Nash, and he said on multiple times and occasions that you actually paid interest to yourself. And like on page 48 of his book, he said that the interest never leaves your account in control. On page 24, he says that you can recover. all the interest that you are now paying to someone else. And if you do this, at least in his words, what happens is you're creating your own pool of money that you can use to finance purchases such as like a car, and you can avoid having to pay that interest to somebody else like a bank. And so once again, you're just keeping the money in your own pool. Now, it makes a lot of sense when he says it. It sounds really great. He actually compares paying interest to somebody else or like shop, like for instance, he used the grocery store analogy where he said, if you own a grocery store and that grocery store is your pool of money, why on earth would you shop at another grocery store? He said, that's tantamount to robbery, right? So he's like, you know, you always need to create your own pool of money. Now it sounds great, but in reality, it just doesn't stack up that way. So to show you that you don't actually pay interest to yourself, I made a couple of policies. One was the control where no loans were taken. And the other is what I call the experimental policy where loans are taken out. Now, carrier specific information for you to know. The carrier that I use to illustrate this is a direct recognition carrier. That means that different dividends are awarded on loaned dollars versus non-loaned dollars. All right. So keep that in mind. Because of that, you are going to see there be a discrepancy in the two policies after many, many years of doing this. You're going to get different amounts of dividends. At this carrier for years 1 through 10, there's a 65 basis point spread between loan and non-loan dollars. And years 11 plus, the dividend is just going to be the policy loan interest rate. And so for years 1 through 10, what they'll do is they'll take the policy loan interest rate. and then they'll subtract 65 basis points. And then from years 11 onwards, they take the policy loan interest rate, and that's just also the dividend for any loaned dollars. Currently, the dividend interest rate is 6% for this product, and the policy loan interest rate is 5.3%. So the way it's going to work is that the control policy, the one that we're not doing any borrowing with, no loan is going to be taken out. That's going to be over here. And then on the other side, there's going to be the experimental policy. And the experimental policy is going to have $100,000 of loans taken out every five years and is paid back within the same period. That's what happened five times over the life of the policy. So here we go. Policy without loans. Let's just jump in. As you see, $50,000 a year is going to contribute to the policy for the first five years. And then I instituted something called a premium offset, right? which is where no further... premiums get paid. And this is also kind of in the style of our Nelson Nash, like kind of the traditional infinite banking, which is where you max fund a policy for five to seven years. And then as soon as it can essentially pay its own base premium, you kind of just let it do that. And then you have even more policies, but we're just looking at this policy right now. So 250,000 gets contributed to this policy and then no more. And you see that happens in the cumulative premium outlay column. 50 becomes 100, becomes 150, becomes 200, becomes 250, and then it stays at 250. Nothing else gets contributed to this policy. So 250 total gets put in. Here's the policy with loans, right? So as you see, it goes all the way from 50 to 250, just like the first one, except now starting in year six, there's another column that's been added to the right, and that's the income column. And what happens there is that that income column is a loan. So a hundred thousand is getting borrowed against the policy. And then from year six through 10, that $100,000 is getting paid off. And so the $100,000 in the first year, because once again, there's a 5.3% interest rate. So as you see, the math works out is that by the end of that first year, that $100,000 has become $105,300 and that gets paid off over the course of five years. And that happens for every five-year period for five more periods. So $100,000, so $500,000 total is taken out of the policy. But then there is a greater number that's actually been paid back in. And you'll see that at the very bottom of the column here, you'll see that by year 30, $815,000 got paid back into the policy. And the way that works is that if you look over on the left-hand side of the red column, that there is $30,000 a year. that's getting paid back into the policy. So in year six, they took out $100,000. And then in year seven, eight, and nine, $30,000 is getting taken out. And then in year 10, $23,000. So if you add all of those numbers together, you get $113,000, just over, which means that $100,000 loan was taken out. And then over the next five years, there was about $13,000 in interest paid every year. And if you multiply 13 times five, because this happened five times in the policy, you'll get $65,000. And that tracks perfectly once again, because we see in year 30, $815,000. If you subtract $500,000 from that number, which is the amount of loans that got taken out, you get down to $315,000. And then $315,000 is exactly $65,000 more than $250,000. And $250,000 is kind of the basis of this policy. So once again, all of the numbers, they work out very nicely. Now, what does it all come to in the end, right? So you've put an extra $65,000 of interest into the policy with loans. And theoretically, according to Nelson Nash, your policy should have grown even more than if you hadn't because you have somehow controlled this interest. But you will look here and you'll see that is not the case. And so as you see here, in year 30, you're going to see what the policy with no loans, $933,000 of cash value. And then the policy with loans on the right-hand side, Thanks. your cash value is $909,000. So there's a difference, a spread of $24,000. And the larger one is the one where you didn't do anything with it. And with the death benefit, similar story. There's $2.45 million of cash value on the left. And on the right, just a hair under $2.4 million. So about $50,000 less to cash value. So clearly, the one on the right has not actually grown bigger than the one on the left, even though more interest... has been paid to it. And this is an extremely kind of obvious and an objective way to say that there is not more growth happening just because you are taking policy loans. So differences, right? So $250,000 in premium went in the one on the left, whereas the one on the right had $815,000 contributed to it. So once you subtracted the outflows from the loans from the one on the right, and then You also added the interest. That just showed you how they are literally the same policy. But even though more premium went into it, there was still a smaller policy at the end in terms of both cash value and death benefit. So the numbers here, I just want to go over the numbers, $933,000 of cash value for the control policy. And then year 30 cash value was $909,000, which is a spread of about $24,000. The year 30 death benefit was $2.45 million. Year 30 death benefit of the experimental policy was just under 2.4, which means about 50,000 of difference. And the total cumulative premium of the control was 250. And the year 30 cumulative premium on the experimental loans was 315,000 once you subtracted out 500,000 for the loan principle. So what's the verdict? The extra interest that you pay back into this policy does not actually stay in your control, but it is considered revenue for the carrier. You do not pay yourself your own interest. You can see this because the cash value and the death benefit of the experimental policy is not higher than it was for the control policy. Now you do indirectly benefit from the loan interest since in a dividend paying mutual insurance carrier, they do share profits with the policy owners, but it's indirectly. It's not a one-to-one, like you pay $1 of interest and you get $1 back in dividend. It's an indirect, it is not a one-for-one ratio. Now, I want to also... put forward, there's something I'm calling the threshold of activity, is that there is a number at which it makes sense, given this policy, this is not, say, a blanket statement for all policy, that it makes sense for this policy owner to do something with their policy over the 30-year period. So the threshold of activity is where I'm adding the cash value loss for taking the policy loans, which was about $24,000 over the 34 period, and the policy loan... interest that got paid, just the extra interest that did not have to be paid by the person with control. So adding those two together comes out to $90,000. And that is the number at which, if you, by borrowing and whatever reason you took out that $100,000 for, If over that 30 year period that you could earn more than $90,000 of post-tax gain from this income producing activity, you would be better off than having never used your policy at all. And I also just wanted to show one more slide of just like another reason why you do not pay yourself interest. As you see here, this is not from the same carrier. This is from a different direct recognition carrier that we also work with. And they just have it a little bit more bluntly than the other carriers. And this is their asset class allocation that they're taking all of the premiums being paid by the policy owners. And they're investing it into different asset classes. And they literally have a line item on this asset class allocation for policy loans. And they're only going to have this as a line item if they are actually earning revenue from it. If it was being invested directly back into the policies, it wouldn't actually count as revenue. they're literally counting it as revenue, as you can see right here. Now, the upshot for all of this, you know, there's actually a surprisingly little loss of efficiency when borrowing against your policy. I mean, $24,000 over 30 years is honestly not a lot. And contrary to Nelson Nash's point, though, you do not recover your interest. You end up paying $65,000 of interest to the carrier, and that's that. You indirectly benefit from it, but do not directly benefit from it. This should not dissuade you from borrowing against your policy. Far from it. Rather, the fact that you're going to have to pay this extra interest should make you a little bit more choosy about what income producing activities or investments that you're putting your money into and what kind of gain you like to experience if you're going to add that extra volatility to your portfolio. So if in this situation, if you were the person who borrowed against the policy in the same way that you saw, if you netted more than $90,000 in post-tax gain from the income producing activities. over 30 years, then you would be better off than if you had never borrowed against your policy. And that's, and ultimately that is the, there's a cost to doing something and there's a cost to doing nothing. And if you think you can exceed the cost of doing nothing, then you should definitely do it. But just realize there's no such thing as a free lunch. And there's no such thing as you are paying interest to yourself and getting the money put back in your policy. Thanks so much. If you have a comment, please drop it below. I'd love to respond. There's a wealth coach here, better wealth, like... like myself or one of the other ones who can help you, we would love to. Please book a call, send us a message, something that we would love to help you in whatever your situation is. Thanks so much. Bye-bye. Most people have no idea how to really evaluate whole life insurance. And that's why we built The Vault. It's all of our best resources and educational materials rolled in one. I mean, we got a calculator, a handbook, we got a crash course, deep diabetes on the topic, all in one place and all for free. So click on the link in the description below or on the tag comment.
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