When Should You Borrow Against Whole Life Insurance?

In this video we're going to set the record straight on when you should borrow against your life insurance policy versus when you should not borrow from your life insurance policy. This video I've wanted to make for a while. I've shared in a lot of our workshops. We've used this in our training when we train other advisers.

But I just feel like there's so much misinformation and misleading information and bad math, and so much people that have the right heart, I think, behind their message but leave viewers really confused and maybe mislead them. And as a result, I just want to set the record straight and show you when mathematically you should borrow against your policy and when mathematically you shouldn't.

And a lot of people will say, well, this allows you to, you know, literally get rich buying cars. And I'll share with you why they're right on one stance but, I think, wrong in another. And this will, again, from a mathematical perspective, show you why I'm so avid setting the record straight, because I've gotten so many questions of people that just don't understand the mechanics of how this works. And so that's the hope of this video.

Control. When life insurance is set up and used properly, you can access your money through a collateralized loan, letting your money continue to grow. And so obviously that's a huge benefit, and it's one of the reasons why I save so much money, because I will get all the future benefits of my dollar and I'll be able to use my money. That's why I've used that, why we call it the AND Asset.

And so this is kind of like a credit card versus a debit card. I, you know, I know Dave Ramsey is not pro credit cards. I think a credit card is a no-brainer. You get better protection, you get points, and I would never buy things on the internet with a debit card, period.

So this is an example where the reason why a lot of people use life insurance, and we call it the Infinite Banking or whatnot, is you can, you know, get extra points for spending your money, and those points are your money is continuing to grow. So you have the efficiency of your money continuing to grow.

And so the idea of this is you put your money into a compounding machine. Your money will literally compound till the day that you die. That's incredible. You borrow against the insurance company or a third party, and you're borrowing against your money. You're not borrowing your own money. And so when you borrow against your money, your money is continuing to grow, and then you can buy an asset or a liability.

Now, a lot of people will say, well, I get wealthy buying cars, and this is what they mean. My money continues to grow, and I bought that car, I pay back the insurance company, but my money is continuing to compound the rest of my life. That's true. That's 100% true. Your money is going to compound regardless.

The point that I want to make is you're not becoming more wealthy buying that car. In fact, I think you lose a lot of your liquidity, i.e. the ability. You don't have unlimited money that you can borrow against. So you lose some of your liquidity and you buy a liability. And yes, your money will compound, but it will compound regardless if you borrow against it or not.

So what I'm saying is, yes, your money grows while you bought that car, but it would literally have grown the same way, and you just bought a liability with your borrowed funds, when you potentially could have gone to a credit union or a bank, took out a loan there, giving you more credit capacity and more ability to potentially buy assets that would create a stream of income and an actual appreciation on your borrowed cash. And I'll break that down more.

So the concept of this, of having your money grow while you borrow, whether it's for a car or whatnot, is based on this idea of your money will literally grow the rest of your life while you borrow against it. So again, the power of borrowing against this is still the most efficient way to use your capital, because when you pay cash, you kill the compounding curve, and life insurance will allow your money to compound until the day that you die. And so there's advantages here.

But really, when we think of what banks do, and this is what I really want to set the record straight here, is, like, banks understand the idea of using our own money, and we can do the same thing, but we have to follow the math. So banks will give you some type of money when you deposit, and let's just say they'll give you 1%. I think that's generous at the time of this recording, but we'll just say they give you 1%. So I put $100 in the bank and I make 1%. Okay.

Now they'll loan out that money. Let's say they charge 4%. Okay, this might be on the low end for this time of this recording, but let's just say they loan it out for 4%. The question I have for you is, what rate of return did the bank make? I gave them 100 bucks. They paid me $1. They loan out my $100 for 4%. They made a grand total of 300%.

Now that might shock you, because you might have thought they made 3%, but at the end of the day, their investment was what they paid me, because they're using my money. And banks can, I mean, they create more velocity with fractional reserve lending, but the point of the matter is banking is an incredible, powerful mechanism, and we can learn how to do this, and we can actually leverage against our own money. But we have to make sure that the numbers add up.

And so, when does it make sense to borrow? This is, I broke this down, and I'm assuming the control cost is 5%. Why do I call it control cost? Because this is the cost of controlling capital. We're going to say 5%. I know some insurance companies are lower than this, some are higher, but the point of the matter is, if the insurance company says you can borrow against your capital at 5%, why do we want to borrow against our money?

Well, we get all the benefits of our money continuing to grow, and if we withdrew that money, we couldn't put it back in. So borrowing allows us to get this compounding machine, in the future ever-increasing death benefit, and using our money. So again, there's people that are like, it's free to borrow your money because you're earning in your policy. No. Let's assume you're earning 3% or three and a half percent, so you're not getting arbitrage.

But the life insurance will give you far greater rate of return or benefit over your lifetime than 5%. That is why you would want to borrow. That's a whole another video, but life insurance, because of all the benefits it's giving you in the short term and long term, are giving you a better result to your portfolio than 5%. I can break that down, but yes, I just opened up a can of worms. You just got to trust me that life insurance will give you a better result short term and long term to your portfolio than 5%.

That's why, in this example, why you would borrow against it for the future value that life insurance is going to give you, and that's why you'd gladly be willing to pay 5%.

Now, if you took a control cost of 5% and invested in a 2% CD, congratulations, you earned a negative 60% rate of return. Now you might say, well, Caleb, my policy grew, and so actually I made out. I made 2%, my policy grew at three or 4%, so I, you know, I actually made out more. My question to you would be, why in the world would you borrow at five, take on an additional 5% control cost, to make 2%? Your policy is going to grow regardless. So that activity just got you a negative 60% rate of return.

That's why when I look at people that use their policy to buy cars and they say, I made a bunch of money because I bought this car, it's like, no, your policy continued to grow. Maybe that was more efficient than paying cash, I'll give you that, but you can't tell me you made all this money buying this car. Your money compounded in your policy, but that activity didn't necessarily put you ahead.

If you borrowed at 5% to earn 5%, that ROI would give you zero. Again, I wouldn't do that deal. If you borrow at 5% to earn 7%, boom, now you make a 40% rate of return on your money. Remember, your money's in your policy. It's going to continue to grow whether you borrow against it or not. So at the point of borrowing, that's not relevant. I don't care about the money growing in your policy. It shouldn't justify the next activity that you do. Your money's growing regardless.

When you borrow at five and you earn seven, now you're earning 40% rate of return on your money, because, again, you're not using your money. You're using the insurance company's money. And if you, you know, borrow at five to earn 12, now you're getting 140% return on your activity and earn return on investment.

So again, when I talk about people utilizing their policy and giving your dollar more than one job, you can only give your dollar more than one job in a good way if you're actually earning a greater rate of return than 5%.

Now let me break down the car example again, because it's what a lot of people use. Is it possible that you could earn a greater rate of return by having a type A car, let's say, in a certain profession? The answer could be yes. So if you're in sales and you drive a nice sports car, you might say, hey, this sports car is going to allow me to earn, you know, extra $100,000 because the people I can impress with the sports car. That's a whole another video on identity. You might have to, you know, follow my personal channel for that.

At the end of the day, let's just say you're going to make more money with the sports car. Then you need to factor this into the equation. If going on vacation mentally puts you in a better head space so you can make more money, great. Or you just need to admit, like, hey, this doesn't make sense from a rate of return standpoint, but I want to live intentionally, and intentional living is worth the negative 60% rate of return that I'm earning from borrowing. You just have to understand how the math works. We can't lie to ourselves about bad math and think that we're making the right decision. And that's where I'm passionate about this concept.

So this is the actual mathematical equation, if you want to do this at home. You take the investment, you minus it by the control cost, and then you divide it by control cost. It gives you a number. You multiply that by 100, and that's your rate of return. So for example, at 12%, say it takes you 5% control cost, divide that by 5%, it gives you a 1.4. Multiply that by 100, that's 140%. That's how you can break down anything. So you take the investment, minus the leverage, divide it by leverage, you get that number, multiply it by 100.

Now, one thing I will say is this equation is not factoring anything about risk. So a 12% investment most likely has more risk than a 5% investment, so you have to figure out how to factor that in, and everyone has a different risk tolerance. But that's the big mistake that people make when they borrow against their policy. They're just looking at some stated rate of return, but they're not factoring in risk to that rate of return.

Third-party lending is something that we use. And why do we use it? It's because if the insurance company will give me a control cost of five, and I can control my money at a third-party lender that I can give my policy to for collateral, and said instead of 5%, let's say it's 3%, then I take the same investment and earn a 300% rate of return. The risk didn't change in this equation. The only variable that changed is my cost of controlling capital.

And so again, as a savvy investor, we should always be looking for different ways that we can improve the deal. And in my case, a lot of our clients use third-party lenders to improve the term of accessing and controlling capital, and as a result, they take the same investment, instead of earning, you know, a good rate of return, they earn a great rate of return, just because they're lessening the actual cost of controlling capital.

So what are the takeaways? Life insurance is an incredible place to store and use your money. Your money will continue to grow whether you don't borrow, whether you buy cars, or whether you buy assets. It will continue to grow. But we can't say that borrowing from our policies is making us more money if we're buying liabilities. We can't say that.

Now, if we understand the math and say, I know that going on vacation or buying this liability is not going to make me richer, but it will help me unlock intentional living or whatnot, I'm totally cool. But the only way that we can mathematically get our dollar doing more than one job in the borrowing function is if our activity is earning a greater rate of return than the cost of borrowing our funds.

And if that's the case, your life insurance is one of the only paper assets that can give you amazing growth and amazing benefits to your policy, now and in the future, and give you the access to use capital to make rates of return, cash flow. If you can do both, you literally get a dollar doing more than one job.

Love to hear your thoughts. Would love to hear if you have any other questions on this. I think, again, I'm passionate about helping people think differently, but thinking correctly as it relates to the math and how this works, and that's why we make videos. So if you're not subscribed to this channel, please do so. Please let me know if there's any other videos that I can make that can help answer your question.

Also, if you have more questions about life insurance, the AND Asset, how it's structured, go opt into our AND Asset Vault. Our AND Asset Vault is a free vault that gives you a master class, gets you a 50-page AND Asset handbook, gives you an amazing podcast series that I did, where I chopped up the best from all the amazing people that I've interviewed on this subject of Infinite Banking and the AND Asset. You'll hear from different perspectives on retirement and Infinite Banking and control. It's just so incredible, so make sure to check that out.

And if you want someone like us to look at maybe a policy that you have, or if you have questions about, will this help me with my financial goals, we would love to help you. And so just know that whether you have questions or have desires to implement, we are willing and would love to chat with you and help you in any way possible with that. Have an intentional rest of your day.