Can You Borrow From A Life Insurance Death Benefit?

What they're really doing. When you're taking a policy loan, you're taking, it's like you're taking an advance on the death benefit, but you're only taking an advance on the portion of the future death benefit that is available today. So cash value in a whole life contract, really one way of looking at it is it's a. It's the present value, today's present value of the future death benefit.

Trying to borrow with today's equity again, so you can borrow more money, like borrow future value of your house and you want to collateralize your today's equity. So basically you are, like you said, you're working with two different time frames, something in the future, but you only have equity as of today. You don't have this equity accumulated. How much it will be there in the 30, 40, 50 years from now. You don't have that. You have to wait.

The question I received from one of my clients and I found this question very interesting, is why cannot I borrow against my death benefit rather than borrowing from a cash value? Right? So this client understands the infinite banking concept. He loves it, but he is thinking, hey, I have a death benefit which is greater than my cash value is. It would be nice to be able to borrow against it. Right? Like you borrow basically more, why cannot I use or spend my death benefit today or borrow against it at least, right? So why don't we address that? I thought maybe it will be beneficial for our friends and our community to also discuss that.

Yeah, I love it. It's a really good question. I've had this question in the past. I don't remember the last time it came up for me. I'm sure it was quite a while ago. But it's kind of like, you know, what the question is really saying. It's kind of like saying, hey, can I treat my death benefit like a margin account? You know, margin accounts kind of like where you can. You're borrowing money without anything, any collateral on a value, and you're taking the risk that, you know, whatever your investments in the stock market or something could go up or down. And then you could have the margin call. You know, everyone's familiar that margin call is right? So, you know, there's kind of maybe a little bit of similarities there. And so what's really neat about this question is obviously, I mean, if someone could borrow, let's say, the value of their death benefit, I mean, that would be amazing. You'd have a lot of accessibility. However, it would also create a lot of risk and One of the people that it would create risk for. One of the, the where the risk would be held is actually with the life company. Because the life company is on the hook, they're contractually obligated to pay that death benefit. Now when we say death benefit, there could be many pieces added together to create the death benefit. So as an example, I use myself as an example. I have one particular life insurance contract of the many that I have and this contract has I think the, I believe the original starting death benefit is something like a hundred thousand dollars of whole life and it has term insurance on it. The term insurance is around, I'll ballpark it, we'll just say it's $900,000. Now in that particular contract, I have also accumulated new death benefit of paid up additions. And so just to keep the numbers really simple, let's just say that I've accumulated $500,000 of new death benefit in whole life since I've owned that contract. So what do we have? We have 100,000 start, I've added 500,000 of new death benefits. So we've got 600,000 and then we've got that, that term on top of that of 900,000. So we have $1.5 million of total death benefit. Now the actual cash value is again, trying to keep everything super simple here. Let's just say the cash value is 100,000. So just imagine for a moment you own a house and that house is worth today it's worth, let's say $600,000, but you only have equity of 100,000. Okay. And you want to go to the bank and say, banker, I'd like you to lend me $1.5 million against my house that is only worth 600 and I only have a hundred thousand of equity. I mean no bank would do that. They're retaking all kinds of unnecessary risk. Right? Yeah.

And the banker may ask you, why would you, how did you come up with this 1.1 million, 1.5 million. Say, you know what, my house will actually be worth 1.5 million in 15 years or 20 years. I want to borrow against that future equity that will be there. Right. So will any bank lend against some future potential? We know that real estate goes up in price, Right? So but will anyone be able to lend you money against some future value of your house?

Probably not.

You know what, what do you think your banker would say if you went in and asked that question? Right, but let us know what your, you know what your banker, you think your banker would Say if you went and asked them that question. And so tying that a little bit closer, the insurance company, what they're really doing. When you're taking a policy loan, you're taking. It's like you're taking an advanced on the death benefit, but you're only taking an advance on the portion of the future death benefit that, that is available today. So cash value in a whole life contract, really one way of looking at it is it's a, it's the present value, Today's present value of the future death benefit.

Yeah.

And, and then it's always changing because it's increasing. It's. It's reaching and it's chasing after. It's like it's climbing stairs to reach after the death benefit. That keeps getting farther and farther out. And so you're always accumulating new cash value. So your loan availability goes up, a number of other things happen, but you can only access.

Against the cash value as collateral. The cash value, although it is called cash value, is a representation of future death benefits. So the two things are linked. It's kind of like a symbiotic relationship. So if anyone here is like a Marvel Comics fan or whatever, you know, like about, you know, the, the, you know, there's a Venom movie came out recently. Well, that's like a symbiotic relationship between some crazy alien suit and the guy. Right. So same kind of concept with this, this death benefit and cash value. It's. There's. They're connected at the hip and they're just looking. They're, they're this, they're really the same thing, but they're the same thing represented in two different points in time.

Yeah, exactly, exactly. That's a great point, Richard. So what you're trying to do, you're trying to borrow with today's equity again so you can borrow more money. Like borrow future value of your house. And you want to collateralize your today's equity. So basically you are, like I said, you're working with two different time frames, something in the future, but you only have equity as of today. You don't have this equity accumulated how much it will be there in 30, 40, 50 years from now. You don't have that. You have to wait all this time to build this equity in your house or your, in our case, it is a death benefit or in cash value. You have to wait. You have to be alive 30, 40, 50 years from now in order to have this equity, have this cash value to borrow against it. You don't have it Right now.

That's right. And you know, another thing that's important is I'll take this one step further. So let's just assume that you could do that. We'll, we'll, we'll try to again, keep the numbers simple. I'll start over fresh to keep it very simple. So we have a million dollar death benefit and cash value is 100,000. Well, let's assume that we could get a big loan from some, some entity, some individual or organization decides, yes, we're going to lend you money against the death benefit. So crazy individual, 900,000. And you only have 100,000 of death net death benefit left. So if that were to happen and then all of a sudden, out of nowhere, you, you as the policy owner, stop making the premium payments. Yeah. And that policy collapses and the policy is no longer there, also the death benefit, and is gone because you didn't fulfill your contractual obligations, right? No, but the death benefit wasn't collateralized against anything. It's collateralized against your death. A payout value upon death. They can't collateralize that against anymore because the insurance contract is gone. So the, the, the lender is holding all the risk again. Now what they're going to do is effectively, quote, unquote, a margin call. They're gonna say, whoa, whoa, wait. We checked with the insurance company because we have a collateral assignment on this death benefit. And they told us that this contract's no longer available. In fact, the moment that the contract expired, they called us and said, hey, just so you guys know, all of your protection that you have on that loan, it's not there anymore. The, the insured person or the, the policy owner canceled the contract. They stopped making premium payments. So the bank, the lender is going to say, okay, hey, guess what? You owe us 900 grand on this loan plus interest. And now you have no way of repaying it, even at death. So now you've left your family and the loved ones and the people that follow you destitute because we were trying to bite off more than we can chew. So everything has to happen in a, you know, there's, there's, there's a logic to how things take place. And when we start to exercise, Nelson said at the very beginning of the book, becoming your own banker, that this is an exercise in logic, reason, imagination and prophecy. And so if we exercise a little bit of logic, we utilize our ability to reason. Okay? And then we recognize that we can think of, think through and use our imagination to figure out how we might work with what we've got and, and plan around the usage of capital and think of the different opportunities that will come our way and where we're spending money and how we could be reallocating money, etc, then you could prophesize how that might play out for you in the future to a degree. And the nice thing about when you're dealing with some, some known and consistent things like participating dividend bank whole life we can project out very reasonably based on inputs. Okay, based on inputs, a future output, future output of death benefit, a future output of cash value. Now there's some wiggle room there. Dividends are, you know, we're anticipating some dividends or pay by the life company but we can't control those and we can't control the profitability of the life company. What we can do is we can recognize they've been historically proven consistent as in they've been paying dividends for 100 years or 150 years given, you know, depending on the life company. So there's high consistency but it will fluctuate a little bit. Now when I said inputs, inputs is really important because those inputs are the minimum required ones to keep the contract going. And then there's the optional flexible paid up addition premiums that you can, you can fund in a, in a well designed contract. Those are completely on you. And so we could run a projection showing them in there, we can run a projection showing them not in there. But what actually happens on your day to day life we can't predict. And from a year to year basis we don't know. Maybe like as an example, maybe you were one of the people affected during COVID where all of a sudden you, your, your job wasn't there anymore for a period of time until you could, you know, they released some of the rules or whatever, in which case that had an impact on your income. So you might not have been funding as much into a policy during that time frame.

Of course.

So all these, these little details have an impact on the end result. And the person, the individual that has the biggest impact on the end result isn't the life company. The buck stops right here.

Yeah, exactly. So, you know, you raised a very good point, Richard. So the death benefit is actually very hard to determine based on my behavior. For example, on my own policy I can work with many different numbers. My starting debt benefit was $222,000. And if I pay my premium still, I turn 100 years old every single year. I don't stop, then my death benefit will be at 2.5 million. So which one do I borrow against? Do I borrow against 222 or 2 1/2 million? It's like 10 times difference, right? So it is really hard to say, it's really hard to basically even predict what my behavior will be, what my income will be in the future. And it will affect my ability to, to make those premium payments and, and basically create my cash value. My cash value is also driven by the increasing debt benefit. If I build my debt benefit is if I build those blocks of paid up additions, then my death benefit goes up every year and then my cash value also goes up. Why? Because these two numbers must match my death benefit and my cash value will match when I turn 100 years old. But it is my behavior to, to make sure that this money is there. Right? That's why we create this compounding effect by our actions, by our behavior.

And beautiful thing about that too, Roman, is that the behavior you demonstrate. So again your, your actions, your decision making process has a direct impact onto the success of the policy. Now you, your behavior can impact the, the dividend potential. Which, which is, which is, which is your share, your, your personal share relative to the size of your policy, of the entire surplus, divisible surplus of the insurance company on an annual basis. But your behavior, what you do, determines how your policy can accumulate in size based on those blocks you identified. And therefore ergo, the dividend that you can receive in that year and then the compound effect of it every future year is directly correlated to how you interact with the policy. So the life company left to their own devices, they're going to do what they're going to do. They'll issue the dividend if they're profitable. No, every, every year like clockwork. And they're really good at doing that. But they're only going to issue your proportional share of dividend relative to the size of your policy. So if you impact the size of the policy, you therefore impact and improve the size of dividend potential that in, that goes with it each and every year.

Yes. Yeah, absolutely.

I had another kind of question come into mind recently and that this came from our recent client conversation and it had to do with, you know, repaying and recapturing debt. And so we talk a lot about recapturing debt. We have many great videos, you know, on our YouTube channel and everything about that. Some of our team members are just absolute ninjas at teaching people how to do that in a demonstrated fashion. Some great, you know, kind of case studies. But what was interesting about this particular scenario Is that here's an individual client that, you know, they've got a property and they used to live in that property, but now it's a rental property. They had to move for work across the country and they have that property rented. It's almost break even. It's not really cash flowing, but it's kind of maintaining itself. Roughly speaking, the problem is when they purchase that property at a peak market and the market condition in the location is now down, so they're almost owe, roughly speaking, double what the property is worth. Okay, so just to keep the numbers simple, let's say the property could sell today for 150,000. You know, after real estate commissions and everything, they would get maybe 150 out of it. But the mortgage is about 300 mortgage and a line of credit. So the combination of those two factors. So that's, that's not an ideal situation, but again, not within our control. So here's a, a demonstrated case where the, the market condition of an increasing real estate market. We say real estate, you know, over time it always goes. A lot of people say, well everything goes up over time. Or you can make a statement that anything. Well, you know, over time I get older Roman.

About time in any different way we want. So, so yeah, in there's a trend line that you can draw that real estate prices go up, but that doesn't mean it happens in every geographic area. And sometimes recovery can be really long. So if you're buying at one of those peak phases and then the market drops, you know, substantially over a while, it can take a really long time to recover. So that hasn't happened for this individual. Now here's the thing. They really wanted to start recapturing their debt using a policy and a great idea, great objective, but after asking some questions and kind of verifying what the real situation was, the problem is if they go and they go and access a policy loan or go to access capital, even if it was their save money, whichever, and they put extra down on that mortgage loan, what they're really doing is they're strengthening the security and the safety net of the bank that has the debt. Right now the bank has all the risk because in the event that you they foreclose on the property, they can't get their money back. So does it make sense to send good money after bad money? And you know, I submit in that circumstance it doesn't. Now if there was a position where maybe she, this individual had to sell the property or they were required to do so, there's going to have to be a cash call, they're have to come up and raise that capital in some way. Well, wouldn't it be better to take the time and start putting that capital away, having liquidity, having access, having control of it so that in the event that happens, they can stroke a check, they can take a policy loan and pay off that remaining balance if it's absolutely necessary, but not giving extra money to strengthen the bank that they don't own and control.

Yeah, exactly. That's a, that's a really great point, Richard. And you know, so I also wanted to touch on, on another aspect of this scenario where someone pot essentially or theoretically is borrowing against the death benefit. Right. So what may end up happening is that your daily growth will be way lower than the interest on that loan. I mean, we're not even talking about. This is, this is real. It is not real. It is just imaginary situation. But the math, if you do the math, then.

It'S very clear that the, let's say 5 or 6% loan on 500,000 will overgrow immediately overgrow the daily growth on a basically policy that just have started this or last year. Right. Would you not agree with that?

Yeah, yeah. So let's, you know, put that in some more, quantify a little bit further. So you know, take that example one step more. You have a $500,000, again, like say death benefit, you get, you get a loan against that and well, 10, 10% interest would be 50 grand. So cut in half, let's say it's 5%. So it's about 25 grand just to keep this very high level, very simple from a, sketching out a bunch of math. And now you've got a policy, but the policy that you're putting in the premium is maybe only 5 or 10,000 a year. You've only got cash value, let's say of $10,000. Well, that would be like saying, okay, I'm going to go, I have an investment or I have a Savings account with $10,000 in it and it's earning whatever. Let's say that's earning 5% or even.

Earning 10%, couple thousand dollars per year.

That I've generated in that, in that $10,000 account. Meanwhile, I've got a loan for $500,000. That's that I'm paying 25 grand on. Now if I could take that 500 and maybe do something productive with it to elevate and increase and take on a whole bunch of risk. I mean, again, now we're getting into that like kind of margin situation, you know, that, that's popular in like kind of, you know, stock market industry. It's a very dangerous position. Now something I learned from Nelson, Nelson in his book he talks about at the very beginning. He talks about how infinite banking came to him. It was built up over time, but it really like really latched on. He became aware that the solution to all of his problems was available if he could just access more money out of the participating contracts he had because, you know, interest rates spike for him. There was a, one of his grandchild, his grandchild was born, had had cancer, didn't know if the baby was going to survive. Their house was broken into and all the silver was stolen because silver prices were up. There was, you know, one of his brothers died. All this kind of happened in about an 18 month period of time. There was just a whole catalyst number of events, really, you know, life changing, very stressful events and it put a lot of major financial pressure on the Nash family. And you know, at that time Nelson was, you know, in his early 50s. So he had been around the block a while. He thought he knew a few things. And what he came to realize is that all the gurus and the real estate gurus were talking about the power of leverage. Oh, that leverage is wonderful. Leverage, leverage, leverage. Everyone talks about how amazing leverage is. Well, you know, you envision leverage. We have a picture of like a teeter totter right in our mind and it's a matter of okay, well I can put a little bit of pressure on this thing to move this on a fulcrum, to move a lot more weight. And he said, Nelson said, all these gurus, of course when their interest rates spiked, they were nowhere to be found. They'd all disappeared. And they weren't promoting their events and their courses and things anymore. And they're their, their, their, their tape books on tape or whatever they had at that time. And he said no one once told him or said or trained or taught about what happens when the lever goes the other way. Yeah, and that was the interest rate spike in the early 80s. That's, that was the, the Nelson was identifying that lever that was creating all the leverage flipped and he was now the, the person experiencing the, the, the, the, the push factor. He was the, you know, someone the bank had to can put a little push a little bit on, on his, you know, his number and really impact him and so massive amounts of, you know, payments, interest only payments, etc. So part of his book is teaching us how to recognize how history does have a way of repeating itself, but also how to take the lessons from history. The basically the. You know, if anyone's seen the movie Tommy Boy, there's a point in the movie where he gets smacked in the face by a 2x4 and he ends up with this big kind of red line right here. And he's like, well, it doesn't really hurt so much here or here, but right here it hurts. And it's kind of like Nelson's using his book and his story, his real life history to give us that two by four smack upside the head to say don't. Don't do what Nelson did. Be aware of this problem that can happen. Make sure you focus on being well capitalized. If you're well capitalized, when the economic tides shift and turn crazy, opportunities are going to show up that you couldn't fathom and you will be in a position to capitalize on them because you have readily available access.

Yeah. So instead of over leveraging and borrowing more than you have and basically be, be a borrower, then it is much more beneficial to have readily available capital to be available. I mean to take advantage of the opportunities that may come by you. And they will track it on, as Nelson said. Absolutely.

Yeah. He said they track you down. In fact, they'll hunt you down.

Well Roman, this was great. I think we covered some really cool questions here today and so hopefully the folks in the community group get a chance to dig into this and, and you know, for our folks that are watching on YouTube when this goes goes up, make sure you check out the playlist that just showed up on the screen. There's going to be some great stuff there. Continue your journey of learning and of course if you want to get some more information, head over to watchIBC.com you're going to find some great stuff over there and we encourage you, if you don't already have one, make sure you check out the description comments below. Get yourself a copy of this book. Become your own banker. Easy to do, easy to read. In fact, we can give you a letter. It explains how to do it and there's no excuses to being successful in your life. You just got to.

And you. You will be glad you did. Yes.

Awesome. Thanks Roman.

Thank you Richard so much.