You Took a Policy Loan Now What | Infinite Banking

There's no repayment schedule, and the insurer says, look, the repayment schedule is entirely within your control. Doesn't matter to us how and when you repay it because we know that repayment is guaranteed. You're in a position of total and absolute control, and that can be an advantage or it can be a disadvantage.

The cavalry has arrived.

And so welcome to another CommandPost episode. Ash and I are going to— we're going to get into what happens after you access a policy loan, right? The part where your behavior is far more critical than the behavior of the life insurance company, the decisions that you make to replenish your capacity for what comes next financially in your life, right? Because having control over your repayment schedule, that's really valuable. But having absolutely no idea what you're going to do with that control, that's how— if you think of the words financial freedom, right? Because those get thrown out pretty loosely. That could really become dangerous. I began implementing this concept in July of 2008, and our family now has 80 policies. They've piled up about $7 million in cash value and $53 million in death benefit. But the useful part of this process for our family is everything that happened along the way, the decisions, the habits that we developed, and all the great lessons that I learned from my late mentor, this gentleman right here, the late R. Nelson Nash. He's right next to me every day. And so here's my first step. that I'm recommending to you, and Ash, I hope that you would agree, get your hands on a copy of this book titled Becoming Your Own Banker. Read it, write down your thoughts and your questions, but please actually read it. It's 92 pages. And putting a wealth-building book beside your bed and hoping that the information just migrates into your skull, that's going to produce pretty disappointing results. And so stay with Ash and I. We're going to talk about this this practically. But let's start with a question asked. So my question is, if you put yourself in the shoes as you are as a policy owner, if you don't have a fixed repayment schedule on a policy loan, why would you voluntarily repay it?

Yeah, exactly. Then you wouldn't really have a roadmap as to what exactly to do.

Right. If you didn't understand Obviously, the importance, because we've all had the use of money up to this point in our lives. We've all had financing experience, whether it was a mortgage, a car, business equipment, appliances, whatever it is. And when you borrow money from someone else's bank, you understand the obligation to repay because the obligation is fixed. The terms are laid out for you. This is what you need to do in order to remain creditworthy and in order to keep the thing that the money purchased, and to obviously maintain good credit and all that other wonderful stuff. But with a policy loan, there's no repayment schedule. You're in a position of total and absolute control, and that could be an advantage or it can be a disadvantage. depending upon the habits financially that you've developed up to this point in your life.

Yeah, that's, that's that repayment schedule that you put together. That's what's going to hold you accountable and be an honest banker, because if not, you're just going to forget about it, right? It's going to fall through the cracks. And then the next time that you want to access capital, you know, you're going to be unorganized and you're going to have less opportunities Unless you are an honest banker and you pay that back. Because at the end of the day, the only person it's affecting realistically is you.

And you, meaning the viewer, the listener, you're already making financing decisions, right? If you buy with cash, that reduces the remaining cash that you have available, right? And borrowing preserves some liquidity, but it creates a debt and it creates an interest cost. Neither choice, neither financing decision makes the purchase free. The infinite banking concept just puts you in a position to control how you're financing the things that you need through the device of dividend-paying whole life insurance, ideally a system of policies. I think a useful question is just, where that approach fits your individual circumstances. Because, Ash, you've heard people share, I've heard it countless times when someone says, I just pay cash for things. Well, when somebody says that, Ash, what happens to their ability to use that cash for something else?

Well, it's been permanently transferred away. It's gone now. You know, there's nothing wrong with saving, right? Saving that cash so that you have the ability to make those purchases. That's a good habit. But where it's being stored is the difference. If you have to then build up that pool of cash and then you go to make a purchase and now you've depleted it and you're starting back at zero, well, how much further ahead are you really? Yeah. You may have the thing that you purchased, But you're starting all over again.

Well, yeah, the purchase ends, right? So when you're back to zero, the purchase ends, but your need for capital keeps going. That's right, right? That doesn't end. And for viewers or listeners wondering, you know, what is a policy loan? Well, when you have a dividend-paying whole life insurance contract and it's piled up cash value, which it begins doing from inception. The cash value rises daily. Now, cash value is not money, mind you. It's the net present value of the future payment of a death benefit. The cash value of the policy is contractually guaranteed to match the total death benefit of the policy by either age 100 of the life insured in Canada or age 121 of the life insured in America. So, for example's sake, if you have one of these contracts, these insurance contracts, and you've piled up $100,000 of cash value over the course of a number of years, and the insurance company permits you to borrow against 90% of that total cash value on that day, understanding that tomorrow it'll be more than $100,000 in cash value because it keeps rising every day. The insurance company is going to advance you real money. The insurance company is going to place a lien on the death benefit of the insurance policy for the loan balance, which is going to accrue simple interest every day. And the reason that the insurance company does not prescribe a repayment schedule is because the insurance company itself guarantees the collateral for the loan. So if you took that money and you went and purchased a vehicle, The insurance company does not have a lien on the car, and there's no credit reporting agency that's been made aware of the loan. You own the car. It's yours. It's titled to you free and clear. The lien for the loan is on the death benefit of the insurance policy, and the insurer says, look, the repayment schedule is entirely within your control. So now the borrower has Created an obligation, the policy loan. The insurance company says, doesn't matter to us how and when you repay it because we know that repayment is guaranteed. It's going to happen at some point, either while you're alive or when the policy is surrendered or when you die and the death benefit is triggered. The loan balance gets extinguished. The residual death benefit gets paid to your named beneficiaries income tax Free. But a policy loan is a real liability. Why does that distinction matter when someone says, I'm borrowing my own money and paying myself interest? That's not what's happening, Ash.

Yeah, no, you're accessing the life insurance company's money.

100%. And you can't make a good financial decision with an explanation that skips over half the transaction. You borrowed the money. Well, you should have a plan to repay that policy loan before you even access it. No different than you would obviously contemplate, what is my repayment schedule likely going to look like if I go to a car dealer and I say, listen, I need to finance the purchase of this vehicle? Well, you're already thinking, what's an affordable monthly payment? What do I anticipate the duration to be? And then the lender prescribes the terms and says, look, if you want access to capital, these are our terms. Take it or leave it. The insurance company says, if you want access to capital, You're the policy owner. We're just the administrator of the contract. You're the one that's in total and absolute control. So you can borrow the money. Repayment is on your schedule. Advantage and disadvantage.

And I think it's important to realize when, when Nelson says that, you know, this concept is ridiculously simple, if you were to think about the process of going out and the hoops you have to jump through and the steps you have to take in order to finance a car, As an example, you're going to go through and do the same thing. You're going to do the research, you're going to figure out what you can afford, what you can't afford. You're going to go through all of that. The only difference is when it comes to the financing decision, you are going to insert yourself in that position to make that choice so that you are the one in absolute control of that. But you're still going to follow through with the rest of it, the repayment schedule, You're still going to do that so you can pay back into the policy loan so that you can reaccess that capital for future opportunities or whatever other purchases that you're going to need and going to be making throughout the rest of the course of your life, plus the growth of whatever happened.

I think having repayment control, well, it lets you plan around your life, right? Like if you have a household with steady income, Or maybe you have a business that's seasonal. Well, the repayment pattern would be different in both circumstances, right? The business that's seasonal might say, hey, look, we're going to structure the repayment schedule so that we can obviously manage cash flow within the business and keep it nice and smooth through those seasonal periods. Whereas the household with steady income would say, okay, we've got a A repayment schedule that we've created. We know that we're going to be able to maintain that and fulfill that obligation that we've made. And we know, much like Ash shared, every dollar that we repay is reaccessible plus more, because every single day that you are driving around in the car that you accessed a policy loan to buy, the cash value of the insurance contract is rising. And so as the cash value rises and the loan balance comes down, naturally you're going to have ready access to more capital. And but the point that we really want to emphasize is make a deliberate plan before accessing the policy loan rather than just saying, hey, we'll just figure out what we're going to do at some point in the future, because that tends to get pushed out too far into the future. And that could obviously create a problem. And so, Ash, how would you help somebody choose a repayment plan that they can actually follow? What would your process be to help somebody do that?

Well, I would figure out what they have left over at the end of the month from what they're bringing in, whether a business owner paying themselves T4 or dividends, or whether they're just a T4 employee. But figure out what their actual free cash flow is. And then from there, figure out, do they actually have the ability to make the payments? Because no matter what, regardless of what the purchase is, we still shouldn't be spending more than we make. Because if we're doing that, we're putting ourselves in a negative. That right there is making sound financial decisions. And I just wanted to comment on one thing from that last bit that we were talking about. There are going to be variables in life that are outside of your control.

Right.

So just life in general, insert whatever you need. But if we look at it through a financial lens, there are going to be other variables outside of our control. The economy, right, to name a few, to name one at least. But that being said, if you could eliminate or remove or take control of a bunch of those variables so that they weren't even a thought, Because you're the one in control. Wouldn't that be something that you would be interested in learning if it's actually possible or not? You know what I mean? Like, that's—

yeah,

that's what we're talking about here. We're talking about how many of those variables in life can you remove out of the equation so that it's less hurdles that you have to jump over to get to what you want to achieve. And this is one of the ways to do that.

Very true. Very true. And, um, Again, just having that control, that flexibility, it's really useful when you know what you're going to do with it, right? Like when you're obviously deliberate. And the whole purpose of repayment is to restore room for a future financing decision. Outstanding policy loans and accrued interest, that counts against your available borrowing capacity. And the repayment, it reduces the loan balance, but it restores borrowing capacity. And that's why someone might voluntarily repay even when they have the flexibility about timing. They want capital available for future use. And so if your family is going to need another vehicle or access to capital for a high-caliber opportunity, Well, then why wouldn't you plan to restore that capacity? The next opportunity is not going to wait for you to finish explaining where the money went. You've got to be deliberate. That's, I think, the point that we really want to get across.

Either way you go about doing things in life, it's going to require planning. It's going to require some thought and it's going to require some discipline. So you're still going to need those things to make good financial decisions. We're just saying, hey, there's a different way to go about doing this where at the end of the day, you and your family are the ones that benefit. And people, I think a lot of the times, they look at it from a lens of maybe sacrificing now for later gains or things of that nature. Look, you're going to be making those financing decisions anyways. You're still going to be making those purchases regardless of what that is, right? That's right. Just as time goes by, Those purchases are going to be made regardless. But who at the end of the day is going to be the one benefiting from that? And what are you giving up if you're not putting yourself in that position of control to reclaim what should be yours to begin with?

Very good points. And let me— so let me talk about how this looks like in our family, just as an example. So we recently financed a vehicle for my nephew. Evan, and he's 18 years young. He's running a successful online hockey card trading business. Both him and my son are co-owners of that business and they do quite well. It's profitable. They do really well with it. So Evan needed a vehicle. So that expense was happening regardless. And there was no question about controlling how we were going to finance it and the arrangement that would be put in place to accomplish that. So we had and have ready access to capital, and we requested a $24,000 policy loan from the life insurance company. And we took the life insurance company's money. Paid the dealership for the vehicle. The vehicle itself is titled to yours truly, not to my nephew Evan. He doesn't get title on the vehicle until the final payment's made. He gets the vehicle, but he gets the responsibility for paying for it as well. And being part of the family, provides you with opportunity to access capital responsibly. And so if we slow this down, Ash, a little bit, the life insurance company lent the money, the lien was placed on the death benefit. That's a real policy loan with real simple interest that accrues daily on that policy loan balance. Evan's monthly payments get sent back to the life insurance company. The loan balance comes down. The simple interest resets on the lower balance every month. And when every payment that we're making, we're reducing that loan balance and we're restoring borrowing capacity simultaneously. Isn't that good?

It's fantastic. And those decisions, those financial decisions being made, They're benefiting the greater family.

Very true. And the car itself is depreciating. It's a car. It doesn't care how sophisticated the financing arrangement was. It's a car. It's depreciating in value. But we control how we finance it, how we collect payments, what we prepare for. And it's simple. We have a loan agreement that our family lawyer put together for us many, many years ago. Anybody can have their attorney do that. If I recall, it cost us about $500 to have the loan document prepared. And we use the same one every time. And the terms are completed in the loan document. And once the loan document is executed and everybody's signed off on it, Then the transaction gets completed. And we have so much policy loan activity that the bank was able to get us set up on automatic withdrawals. So we're not getting checks or we're not getting envelopes of cash every month. We're just auto-withdrawing, much like a bank would. And that happens every single month. Understanding who's receiving Evan's payments. It's not It's not me. I'm the one, the gatekeeper that's saying there's access to capital. I'm the gatekeeper. You have to agree to a repayment schedule. Yes, we control that. So we can arrange anything that's reasonable and comfortable for anybody in the family that's accessing capital. The money goes back to the life insurance company. But because these are dividend-paying whole life insurance contracts, We co-own the life insurance company. It's a reputable mutual life insurance company. The whole process is ridiculously simple, Ash. Ridiculously simple.

To be honest, Jason, I think it's even more simple because when you mentioned, you know, we're such good customers of the bank, they found a way to magically be able to set up a pre-authorized debit For us to be able to control right now. I mean, that's really embracing the 4 characters in the financial play. That's really— but hey, it just shows you money talks. It just shows you what's possible even from a banking perspective. You just got to be making the right steps.

100%. And when that loan, that policy loan, is fully extinguished in about 46 more months, given that he was responsible and, and repaid that policy loan, he will have ready access to everything he repaid, including the equivalent in dollars and cents of all the interest that he paid. Because what was happening to the total cash value every single day Over the next 46 months.

It was increasing every day.

Rising every day. The car is going to be worth a lot less than what he paid for it, but he's got ready access to everything he repaid. And all he needs to do is walk through the gate to say, hey, I'm a responsible borrower, so I'm definitely worthy of access to capital again. It's brilliant.

But it's also a great thought exercise to visualize. If you just visualize, all the listeners now, just visualize this in your head. You purchase something that went down in value. Okay? Every day it goes down in value. The tool that you used to make the purchase is increasing in value every day. Okay? So, just picture that there, right? The opposites moving in the opposite direction. Right? And if you're of the mindset, well, I just pay cash for everything, right? Well, guess what? They've both gone in the same direction.

That's right. That's exactly right. Isn't that good?

Yeah, no, it's great. I was just thinking in my head, like, you should think about scales, right? When you add something and you remove something. But I'm not used to the scale going down in both directions. But I guess it happens.

100%. And if you think of— so let's contrast this. Let's say that my nephew, Evan, he borrowed the money from a conventional lender. Well, it's pretty obvious what would happen if he said, look, I'm going to stop making the payment faithfully. when this conventional lender controls the repayment schedule? Well, we obviously know what would happen. Not only would the car go away, but so would his creditworthiness. And so your discipline as a policy owner shouldn't disappear the moment nobody's chasing you for repayment. If you think of maybe 3, let's just say 3 questions that you might want to ask before Every policy loan. Okay. What will this money do? Be very specific about the purchase, the investment, the need. Where will the repayment come from? Much like what Ash was describing earlier. And identify the actual proceeds. Where is the money going to come from? Is it surplus income? Is it dividends? Is it interest? Is it— what is it? Where's that money coming from to repay it? What happens if, if our repayment schedule is delayed or if it fails? Decide how you're going to handle that. If someone can't answer those 3 questions, they need some help. They need some coaching before proceeding.

That goes back to what we've mentioned several times, Jason, which is being in control can be a good thing, but it can also be a bad thing, right? So, you know, if you're not a disciplined individual, especially when it comes around money, You really need to think this through because once all the restrictions are removed and you're the one in absolute control, you're going to need that discipline because it could go the opposite direction as well.

Yeah, 100%. And Ash, you've used your system of policies for a variety of things. And so, my question to you would be, What did Nelson teach you that took you some time to fully appreciate?

Well, he's taught me several things that have taken a long time to understand and appreciate, right? That's why it's caught, not taught. But I think one of the great things was, is don't just look at the rate that you're being charged in simple interest from the life insurance company. Pay more of that, get into that habit, because really that difference is benefiting you. Because when it goes back to the life insurance company, it's not in the form of interest that's going to the company that you co-own. That's going towards premium. And at the end of the day, when we look at these contracts, we understand that the solution to all your problems is premium.

Brilliant. Brilliant. Well, let's— Let's bring this home for all of our viewers and listeners. So everybody watching, you're obviously going to keep needing money for vehicles, business opportunities, family expenses, unexpected bills. Like Ash mentioned earlier, life's going to happen. You can plan for those needs. You can build resources. You can build a pool of capital. You can become a dividend-paying whole life insurance contract owner. You can co-own the life insurance company. And when you access policy loans, you decide how you're going to restore your capacity for the next thing that you're going to need money for. That's the responsibility that comes along with becoming your own banker. The policy loan gives you options, but it also creates an obligation, right? So both deserve your attention. The questions that I mentioned, I think, are really important. What is this money going to do? Where will the repayment come from? What happens if my plan, my repayment schedule doesn't work the way that I expect? If your answer to the third question is, hopefully, then we've definitely got some coaching to do. I started this journey in 2008. And what our own family has built since then came from applying what I learned, came from being an honest banker, repaying policy loans, And thinking long range. And Nelson helped me to see that long range. I miss him. I think about him every single day. And the best way that I can introduce you to what he taught Ash and I is to put his book in your hands. Get your copy of Becoming Your Own Banker. Read it, underline, highlight what makes sense, circle what you don't understand, and then come and get those questions answered. And we'll put a link in the description somewhere of where you can go and get that book, and we'll just courier a copy. And tell us in the comments, what would you want your family banking system to help you finance first? Ash and I want to hear what you are thinking about. And subscribe to the channel for more CommandPost conversations. It's like when you gain more control over your financing, Use that control to give your future self more choices. That's what I would suggest to you. If you're going to borrow, borrow deliberately so that you keep your next opportunity in mind. And we'll see you on the next CommandPost.

I just have one thing to add, Jason.

Yeah, yeah, please do. Please do.

If I may, to our viewers and listeners, I think it's a very important question and it's a fun, interesting, curious question. Just ask yourself, what if there was a different way?

Ash, this was fun as always. 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.