The Real Risk of a Policy Loan and How to Avoid It | Whole Life Insurance

And Biden will own it. Borrowing isn't about getting the best deal. It's about avoiding the worst timing. If you've ever borrowed money thinking, "Oh God, what could possibly go wrong?" Margin loans optimize returns and policy loans optimize control.

What happens when it goes the opposite direction? Now that right there is risk. So what is your appetite for risk?

In other words, like a margin loan could fail suddenly, but a policy loan could fail gradually and very visibly.

So it's almost like two different types of environments that you're operating in, depending on what you know, that's gonna affect what you're capable to do in those environments.

Both options just are. You just have to understand what's really going on so that you know exactly what to do. Or if you've ever wondered why banks borrow one way while encouraging everyone else to borrow another way, then you're definitely going to want to hear this. Welcome to another episode of The Command Post. How you doing, Ash?

I'm doing good, Jayson Lowe. How are you?

I'm doing awesome. And as I was sharing with you, it was Mike on our team who said, hey, can you Can you sort of have a conversation around the side-by-side of margin loans versus policy loans? And so a margin loan is secured by something. There, there's collateral there, no different than a policy loan. So when we're talking about a policy loan, we're referring to a dividend-paying whole life insurance contract or a system of contracts ideally with a mutual life insurance company, you have a contractual, uh, provision where you can request a policy loan from the life insurance company at any time for any purpose, and you can borrow up to 90% of the ever-increasing, ever-increasing, ever-increasing, ever-increasing, ever-increasing cash value inside of the policy. So the collateral is guaranteed by the life insurance company itself. And the policy owner controls the access and the repayment schedule. The policy owner controls both access and the repayment schedule. If you contrast that with a margin loan, a margin loan could be secured by stocks, ETFs, uh, mutual funds, but the collateral value. So remember what I said about cash value? It's ever increasing. I, I did that like a broken record intentionally. The collateral value for a margin loan is volatile, and the lender controls the collateral requirements. So that's sort of the primary difference. And so based on what you just heard, Ash, if you think of the risk profile of both types of borrowing, both of them just are. It's not that one is good, bad, or otherwise, or that one is better than the other. That's not the discussion. It's what is the risk profile of that contrasting those two different pathways of borrowing? What comes up for you?

Well, one definitely sounds more riskier than the other.

Okay. Could you expand on that?

Sure. So if you have to collateralize something and that asset that you're collateralizing, you're not in control of whether it grows or it shrinks, and that's what's actually being put as collateral, that's a problem because it's not ever increasing, ever increasing, ever increasing. So that's part of the issue is that, you know, not only is there a control problem there where you don't have ultimate control over the repayment and the access and how that goes about, but you also don't control whether or not the asset grows. And that's a definite issue right there. So there's the risk, and the control issue at the same time.

100% correct. And so when I contrast that with a policy loan, the risk that I see on the policy loan side is mismanagement, not volatility. So when you think of Nelson's third golden rule, don't steal the peas. So when you request and access a policy loan, you should have a plan to repay it. So I see the risk as mismanagement because if you give someone total and absolute control over the repayment schedule of a loan, that can be equally risky as it is advantageous. It depends on the human condition. It depends on your temperament, your, your discipline. So if your, if your policy loans exceed safe thresholds, then your policy can be in a situation where it could lapse. There could be taxable consequences. But the difference is with a margin loan, the risk can be very fast and very uncontrollable. Whereas with a policy loan, the risk is very slow. It's very visible. It's very controllable. And in other words, like a margin loan could fail suddenly, but a policy loan could fail gradually and very visibly. Does that make sense?

That makes absolute sense. And when I have this kind of conversation about control and, you know, the policy owner's behavior, I, you know, use the analogy of a vehicle, right? Once you're put into the driver's seat and all of the restrictions have been removed, you're now in full control of that vehicle. So if you think about the safety features that are in vehicles now, I mean, there's monitors for everything. There's lights for everything, right? There's, you know, lane keep assist and all these different safety features. But if you think about just a rudimentary manual transmission with no safeties and barely any ABS.

Yeah.

You know, that's a, that driving is very much different than it is from a fully safe vehicle nowadays. So it's almost like two different types of environments that you're operating in. And, you know, obviously, depending on what you know and what you've been told and the experience that you have, that's going to affect what you're capable to do in those environments with those specific vehicles. So you really have to be— really have to be aware of that, that when restrictions are removed and everything is now on you, you can't point the finger afterwards because your behavior is ultimately the deciding factor on what happens with these contracts.

Thank you, Jayson Lowe. So true. And if I was to say to whether it's a teammate or to a viewer, to a listener, I think the one— if I had to boil it down to truth in a single sentence, margin loans optimize returns and policy loans optimize control. And control is what allows returns to compound uninterrupted. And so, in other words, it's not an either/or. It's not that one is good, the other is bad. Both paths, both options just are. You just have to understand what's really going on so that you know exactly what to do. And because they look similar on the surface, right? It's a function of borrowing. It's a function of of accessing capital, but they're very different under pressure, remarkably different under pressure. If you're borrowing against your investments, your stocks, your ETFs, your mutual funds, and markets are rising, everything feels fine. But here's the one piece that most people gloss over. When the markets fall, which they will, your lender's in charge. not you. And if your collateral drops below their threshold, you get what's called a margin call. So you get that call that says you either add cash, post more collateral, or they go ahead and liquidate your investments on your behalf. And they don't ask if it's a good time to do it. So that's the key is that margin loans don't they don't usually fail when things are really calm, right? They fail when you need stability the most. Whereas with a policy loan, that's different. You're borrowing against ever-increasing cash value. And the most important difference isn't the rate, it's the rules. When people look at margin loans versus policy loans, they go into rate comparison. When I'm talking to somebody, I'm saying, let's compare the rules.

Right.

Let's start there. Access is contractually guaranteed. The repayment schedule is yours, not the life insurance companies, and nobody can force liquidation. So there's no margin calls, there's no forced selling, there's no phone call saying, "We gotta act right now." Does that mean that policy loans are risk-free? Of course not. And that's what I said earlier, the risk isn't volatility, it's mismanagement, and you expanded on that. You talked about the human condition. If you overborrow and you ignore it long enough, the policy can lapse, but that risk is really slow. It's visible. It's not a surprise phone call, right? It's something that is controllable. And so that contrast is irrefutable. Margin loans fail suddenly, policy loans fail gradually. One takes control away from you, the other requires you to stay responsible. Mm-hmm.

Yeah, I like to bring up the example that Nelson uses. What happens when, now depending on how you pronounce it, whether it's lever or lever, but what happens when it goes the opposite direction? Now that right there is risk. So what is your appetite for risk?

Oh, 100%, yeah.

If it goes the opposite way as he got caught, right, in the '80s when those interest rates shot through the roof and went up into the 20%. So that was a major issue, right? It went the opposite way. And, you know, he definitely learned from that. And the example that he learned was don't do that. So there has to be a better way. Just don't do that. Yeah, just don't do that. No, there has to be definitely a better way. And obviously anytime that a loan can be called That must create a sense of uncertainty. Like, that must create stress. That is not a stress-free way of life to be living.

100%. And so, there's this interest misconception that needs to be reset because the cash value inside of a policy continues rising daily, even though you've borrowed against that ever-increasing daily growth. So instead of interrupting a long-range plan, you're financing on top of a long-range plan that isn't being interrupted. And if you really think about that for a second, if you just really think about it, again, this isn't about which one is better. It's about knowing which tool behaves the way that you expect when it actually matters. That's the best way that I could that I could summarize that. And so I think it's an interesting discussion because people obviously naturally want to compare and want to contrast, and that's great.

Yeah.

But I mean, people think that money issues come from bad math and they don't. They come from losing control in the wrong moment. And when you're dealing with a policy loan, it's not going to collapse —because the markets decline, because the insurance company itself is guaranteeing the collateral—versus the margin loan where your investments are the collateral, the investment value. And that's volatile. That's the nature of investing in things like stocks and mutual funds is volatility. And so this isn't about rates and returns or predictions, right? It's all about control. Especially how that control holds up when the conditions shift, when they change. Isn't that good?

Absolutely. I've personally never met anyone that's in control of the markets.

Yeah, I'd like to meet that individual if they exist. I mean, even I know Warren Buffett's retired now, but if he's got some inside takes that he wants to share, Warren, if you're listening to this, I've got my cell phone number in the show notes.

I was just— you brought up his name. Sorry. I was just going to say rule number 1, don't lose money. Rule number 2, see rule number 1.

On that note, so here's the takeaway. Margin loans definitely look smart right up until they get loud. And when they do, Things can go sideways in a real hurry. And whereas policy loans, right, they don't pretend to be exciting. They're boring on purpose. And boring, I think, just based on my going into my 19th year of implementing the Infinite Banking Concept and utilizing dividend-paying whole life insurance contracts as the tool and accessing and repaying plenty of policy loans, Boring is exactly what you want when money is involved. And so if you've learned anything from this short episode, I would suggest let it be this, that borrowing isn't about getting the best deal, it's about avoiding the worst timing. And so—

They do say timing is everything.

Well, here's the— remember the analogy when I said one's like a parachute and the other one's like a bungee cord? When the bungee cord snaps, you don't get a refund. You just get a lesson that you paid a lot for at market prices. And so control isn't flashy, but it's the reason that some people stay in the game long enough to win.

Yeah, a lesson on gravity. I just wanted to make a comment on emotions. I think the conversation that you have with someone who is in the markets and looking at you know, margin loans, that conversation is going to be very different if the person has been burnt in the past and they've experienced that, vice versa if they have not. Right, right, right. So depending on when they got into the markets, if they were a part of this, you know, decade-plus bull market, then everything looks good. You know, the lever hasn't gone the other way. Everything— the sun's out, no problems, right? You can access your loans. Everything looks good. Everything keeps going up, but it only takes once to realize that how bad things can get. And I, I just think that, that if you remove the emotion from the equation and you just solely look at the facts, just put them on a piece of paper, do that side-by-side comparison and look at it. I think you're gonna come to your own conclusion as to what's gonna work out best for you.

Couldn't have said it better myself. Ash, this was great. And to our teammate, Mike, thank you for suggesting our topic of conversation. And I think what we're gonna do next, in our next episode, we're gonna talk, we're just gonna discuss some of the perceived criticisms or flaws with the process. And so that'll be a really interesting conversation that I'm looking forward to have. And to anybody who's listening or viewing, thanks for watching and for tuning in and stay tuned for the next episode of The Command Post. Great time, Ash. Thanks, buddy. Money flows. Once you begin to observe the pattern of flow, you start seeing something that most people miss. Money is always being stored somewhere and borrowed from somewhere. You've got car payments, credit card payments, loan payments. You're paying cash for things.