Richard Canfield explains what happens when you don't repay a loan against a permanent life insurance policy. Unpaid loans accrue interest, shrink your death benefit, and can cause the policy to lapse, triggering taxes. The insurer won't chase you for repayment, so you have to enforce it yourself.
Chapters
Don't make policy loans without making provisions for paying them back. Don't steal the peace. The insurance company's not going to do it. It's not their contract.
There's total and absolute control. There's a lot of flexibility, but that comes with responsibility. Flexibility should not be confused with irresponsibility. So what happens if I don't repay a policy loan? Now, before Rich dives into this, this is where This is where I think people need calm, you know, adult-level clarity. And so, Rich, what happens if I don't repay a policy loan?
Interest accumulates, the loan keeps growing, and that comes off the death benefit. Or if you surrendered the policy because, well, my— in my words, you're a moron and you decide to do that. Don't want to call anyone out, but if you're surrendering a perfectly good policy, I would say that that's not particularly logical behavior.
Right.
Well, then you would have less that you get out of it because a loan's been accumulating. And so if you had a home equity line of credit against your house and you borrowed everything off of it, and then you never sent a payment back, they're going to foreclose on your house. Like, they're going to take the house. So the same kind of premise applies here. The difference is that the traditional bank needs a payment, and if you're not making it, it's going to be a problem. The life insurance company doesn't because it's an unstructured loan. So If you are not the one creating the structure, the insurance company's not going to do it. It's not their contract. They administer the contract. It's your contract. So you have to take the ownership stake as an owner to make that behavior operate, which is why the behavior element is the critical component. Nelson says on the addendum of page 44, before the twin sister example, there are only 2 hard, fast rules in building and carrying out this concept. Number one, don't be afraid to capitalize the system. The more you put in, the more you get back tax-free at passive income time. And number 2, don't make policy loans without making provisions for paying them back. In essence, stealing from your system, just as in the grocery business, don't steal the piece. How simple can it get? So it's in multiple places in the book.
Yeah.
Nelson identifies and talks about the critical component of repaying policy loans. The whole grocery store example has a lot of learning lessons about the concept in it. But one of the core fundamental things is not stealing the peas, which is about not stealing from your business structure, which robs from your future wealth and that of the generation that follows you. So no loan repayments, no loan repayment provisions. If, if a person's even looking at this and they're saying, boy, what happens if I don't repay a policy loan? Really what they want to know is they, they want to know, um, am I going to get in trouble? Like, am I going to get a nasty letter? Am I going to get foreclosed on? Am I going to go, you know, I'm going to have to report that somehow? Like, I think there's those concerns, Jason, because that's what would happen in the traditional banking system world. So if you don't pay a loan in the traditional banking system, there are real consequences. Well, there's still consequences in the private banking system world where you're your own banker. But those consequences are, are the consequences that you choose. It's the choice to have loan interest compound with the life company, which you co-own, to have less available for tax-free death benefit, and to have, you know, less available for utilization because you're allowing interest to build up unnecessarily. Whereas if you were properly structuring your loan repayment and setting a commitment, well, then that wouldn't be the case. So the end result is what happens if you don't repay a loan? The loan keeps going up with interest. Just like any other.
Yeah.
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Policy loans, we've been talking about this so much over the years, they're not like bank loans where someone's calling you every month demanding payments if those payments aren't flowing in. There's total and absolute control. There's just a lot of flexibility. But I've been sharing for years, probably much like you, Rich, is that flexibility should not be confused with irresponsibility. If unmanaged loans grow too large relative to the Policy values, so you have ever increasing cash value. You have an ever increasing policy loan balance in tandem with it. The policy could eventually lapse, and if a policy lapses with gains inside of it, there could be tax consequences. And that that's why proper proper coaching and ongoing management. Matter. Now, if you're working with a coach, the coach is responsible to you, not for you. And the ongoing management is yours. That's your responsibility. And a policy loan is, again, it's a financial tool. And like any tool, I think wisdom matters more than enthusiasm. And so really understanding that, yes, you control the repayment schedule. But that comes with responsibility, and how you do anything is how you do everything. And so if you're already very financially responsible, you have a track record and a clear understanding of the advantages of repaying your, your loans to other lenders on time all the time, then you're likely going to do just fine with the responsibility And flexibility of policy loans.
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