E163: How to Know When it’s Best to Use Your Infinite Banking Policy or Pay Cash

In this episode, Nate answers a common question: when does it make sense to use your policy to pay for something, or should you pay for it with cash?

Topics discussed in this episode:

  • Why would it make sense then to use a policy and actually pay policy loan interest to do something
  • What’s keeping you from actually fully transitioning into becoming your own banker
  • Policy Loan makes sense for almost everything if you have structured your financial position
  • Why You need to set yourself up in the true pure IBC fashion
  • Understanding that there’s no magic in policy loans

Episode Resources:

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Podcast transcript for episode 163: You Shouldn’t Use Policy to Pay 

Nate: In this episode, I answer a common question, which is when should I use my policy to pay for something and when should I just pay for it using cash? This is Dollars and Nonsense, if you follow the herd, you will be slaughtered.

All right everyone, welcome back to the show. It’s so great to have you here. I’m taking this one solo as well to answer a common question we get: when does it make sense or does it really make sense to use my policy to pay for something, or should I just pay for it with cash? So if we could pose the question for a moment, and by the way, really quick too, I did a webinar that’s recorded and you can view it on our website anytime you want. If you go to livingwealth.com and click on the Wealth Creation Resources, there’s a Training Videos and webinars tab. If you click on that, you’ll see a video there. I think it’s titled like Policy versus Cash: When to Use It or something like that, and it’ll dive into some real numbers about this scenario. So there’s a resource that if you want to go a bit deeper into this than just a verbal audio podcast.

But with that being said, the biggest issue I have with this question is that it’s oftentimes asked from a weird vantage point. The idea really would be you have an individual who maybe is going to go buy a car and they’re doing IBC and they have a policy, but they also have $50,000 sitting in cash in a bank account still. So they may have $50,000 in a life insurance policy, they have $50,000 in cash in the bank account, and they have this feeling inside of them that because they’re practicing IBC, they should use the policy to do this. They’ve been around us long enough to understand that our normal recommendation would be to go ahead and use the policy to do this, but there’s something in them that feels like it doesn’t make any sense because if they pull a policy loan from the policy to go buy this car in our little example here, then they’re going to have to pay policy loan interest to the policy, whereas if they just use their cash, then they wouldn’t have to pay anybody any interest.

So they’re trying to feel like, man, what I like to say is they have their feet in both camps at the same time. So they had this, man, I think I should use my policy, but I don’t know why I would and I don’t really know why it would make sense to use it because I have money to go do this thing outside the policy and I won’t have to pay anybody interest on that. So there’s a part of them wanting to use the policy, part of them is just wanting to pay cash, and what I’m saying is, by the way, they are absolutely right, and so I’m going to dive into this.

I think the real answer is that we should set ourselves up in a position to where it almost always makes sense to use a policy to fund something. I’m going to repeat that. This is very important. I think it makes the most sense to set yourself up in a position where it will almost always make sense to use a policy loan to pay for everything including the car. The problem is if you have not set yourself up in a position that is correct, then it may not actually make sense to use the policy for things yet. And it’s not because the system doesn’t work, it’s because you haven’t set yourself up in the right position yet. And so this is where I want to dive into.

So by the way, to answer that person’s question, if they were to come to me and say, Nate, I’ve got cash to buy this car. I’ve also got… And I normally pay cash for cars. That’s the idea. Now, you can listen to this and say, I normally finance cars and they offer really cheap interest rates, finance cars and blah, blah, blah. That’s actually a different question, so pretend it wasn’t the car, pretend it was anything. And I’m merely describing something that you would normally pay cash for that you have the cash to do, you’re planning on doing it. You’re also practicing IBC and you’re trying to figure out when does it make sense. If you were to come to me in that light, I would likely tell you it wouldn’t make sense to borrow money to buy this car if all you’re going to do is leave the other $50,000 sitting in your bank account.

So now you have a policy loan for $50,000 that you pulled out to buy the car and you’re left with having $50,000 in the bank account doing nothing. I’m like, that doesn’t really make sense. I think that’s why it’s a bit confusing. People think they should use the policy, but then they’re like, I don’t know why. Well, you’re right. The real question though, why would it make sense then to use a policy and actually pay policy loan interest to do something? What if they had built themselves a situation that I believe is more correct in the IBC community? Let’s rearrange this a little bit and say, how about this person, instead of having $50,000 in the bank account and $50,000 of policy cash value when it comes time to make this purchase, what if they had something like $10,000 in a bank account and $90,000 in a life insurance policy?

Now this question doesn’t even apply anymore. It becomes quite obvious which one we should do, right? And what I mean by that is, of course we’re going to use a policy loan to purchase the car. We don’t have enough money in the bank to buy it. So I guess what I’m trying to bring up is that the answer to when should I use a policy and when should I use cash, the question itself is actually kind of the wrong question. I believe the right question to ask is more so how do I set my life up to where it makes sense to pay for almost everything from policies? I hope I’m becoming clear with this that the question is not exactly when does it make sense to use one and when does it make sense to use another? The question is, how do I set my financial situation up to where it almost always makes sense to use a policy loan?

And the reality is you get this question more and more often from people who have not gone… By the way, we just did a podcast a couple podcast episodes ago about the four stages of IBC commitment. You get this question all the time from the lower stages of IBC commitment because those stages are oftentimes, IBC is a smaller piece and they feel like they’re listening to episodes like this and they’re doing IBC, they feel like they should be using the policy, but they always are kind of caught in this situation because they have so much money that’s still not even in policies. And what that is a flashing sign that simply says there’s something keeping you from actually fully transitioning into becoming your own banker. Oftentimes it’s a fear of premium, it’s a concern of over-extending yourself with premiums and so you start kind of small and you’re putting money in, but you technically could be paying more premium, but you’re worried about it for some reason, you don’t want it to get too high.

And some of these are very valid concerns, but I’m merely saying that the answer to the question is oftentimes me posing another question to you. So I guess my answer, if there was a person coming in with $50,000 of cash and $50,000 of cash value and they’re wondering which one they should draw from to buy this car, the answer is likely going to be well, just use the cash you have. There would be no reason to pull a policy loan out to purchase this car, or whatever the item is, if the end result is just you being left with a bank account that has a large balance, the problem is not actually which one should we use. The problem is that you still have enough money in the banking world to do all the things that you want to do. And so that means that it hasn’t been fully adopted, you haven’t been fully committed yet to IBC, which is not a problem. That’s perfectly fine, but that’s what’s causing the question.

So the reality is, if you were to have created a situation where you were paying higher amounts of premium, producing higher amounts of cash value, then it would become obvious that we’re going to be pulling from the policy to pay for something, that’s where all the money is. That’s banking. The idea is that I want all my money, as much as I possibly can, inside of policies compounding for me all the time, and then I want to leverage that to purchase the things of life. You’ll make more money inside of the policy if we had higher cash values and were taking a policy loan out to fund something than if we just had lower cash values, lower premiums and were to just continually pay cash for things.

In other words, if we take a car example and we take someone who normally pays cash for cars or any other expense that you could think of in that type of light, then oftentimes what they’ll have to do is they’ll pay cash for a car and then money will have to slowly build back up in their bank account over time in order to purchase the next car whenever their previous car wears out. Now, it’s actually pretty rare that someone is depositing a set amount into a savings account in order to do that. So it’s very common for the money just to happen to be there later on because they live on less than they make and they accumulate capital. That’s the only way you can pay cash for anything is if you live on less than you make and by doing so, capital accumulate and so you have enough money to pay cash for something.

It’s rarely ever a structured basis, and that’s what’s pretty cool about IBC is that we can either add structure to it so we can move that capital into a policy by paying premiums into the policy over a period of time and then leverage money from the policy to go purchase a car. You can just slowly chip away at it whenever you want, there’s no real amortization schedule involved, or you can systematize it and pay back the policy on a structured basis if you want to. You would be in charge of that. But what I’m trying to say is if we were to have set it up, and maybe I’ll make it even simpler, practically nothing in the savings account, $0 and $100,000 of cash value versus $50,000 in the savings account, $50,000 in cash value to purchase this item. And if we had $100,000, we borrowed $50,000 out, I hope you can see that in either scenario we have $50,000 left, but as you put money back into the policy to repay the car, you could say, or to build up enough money to be able to pay cash for the next purchase again at some point, if you were to take the $50,000 out of the bank account, that’s where the money would accumulate and you would be left just practicing banking with a bank account, which is what everyone’s doing.

And what IBC is trying to say is that there’s a better way to do it, but we have to put ourselves in the position where it makes sense. You have to be properly capitalized into the policy. If you don’t set yourself up in that way, then the question is very valid and the answer is actually just pay cash for things. If you’re uncomfortable taking the cash out of the bank account and getting more capital, more cash value in policies through paying premiums, if that’s uncomfortable to you, which is perfectly fine, you will end up in a situation where there’s enough money in bank accounts, because you’re living on less than you make, and you’ll be able to just pay cash for things and rarely will you ever touch the policy, but don’t say that the policy doesn’t, or you don’t understand when the policy loan would make sense.

A policy loan makes sense for almost everything if you have structured your financial position in a way that it makes sense, in which case it would just be you’re paying adequate premiums for where you’re at that is enough to essentially move almost every dollar of capital you can into policies. Then we’ll be borrowing from policies to do all of the larger items and we’ll treat it more like a banking system as opposed to a savings system.

So I know it’s been kind of complex. The other answer, by the way, for this person who came to me who has $50,000 in a bank account, $50,000 of cash value and is asking the question which one should I use, as I already brought up, the answer is typically, well, just use the bank account. There’s no reason to take a policy loan and pay policy loan interest to a policy when the end result is going to be I have $0 of available cash value to me in my policy and I’ve got 50 grand still in my bank account. It wouldn’t make any sense.

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Nate: We could say this: this is the more advanced strategy, the more advanced idea. The answer could be, well, how about this? What if we were to use the $50,000 cash value to buy this whatever it is, we’re using a car as an idea. What if we were to take $50,000 out of the policy to buy the car, which would then free up the $50,000 in the bank account that used to be committed to that? Now you can take that $50,000 and use that as money to start a brand new policy. Now we’re onto something. Now we have a possible solution to this question. You’re putting yourself in a position to where it makes sense to use the policy now. If you don’t want to do that, then just pay cash for it. But the actual solution is really found in two ways.

Either number one, before money accumulates inside of a bank account, before money actually is able to accumulate there, pay larger premiums. Get more money in cash value, and then when things come your way, whether it’s an investment opportunity or a large purchase or a house remodel or a large family vacation overseas, all of these larger ticket items, charitable giving taxes, we have to use the policy because we have situated ourselves where that’s where all the money is already. So you can’t even ask the question, of course we’re going to be using policy loans to pay for this thing. That’s where all of our money is. So you kind of bypass the question. That’s actually how you set yourself up in a way where it makes sense to use a policy for almost everything, maybe beyond just the basic monthly expenses to live life.

But what I’m trying to bring up is you can set yourself up in advance of that to where the question doesn’t really come up too often or, as I brought up, the second solution would be to go ahead and use the policy to fund something which would free up the money that you have on hand to do that anyway, and then use that money to start another policy. Now you’re backing into the situation where in a couple of years, once we’ve been able to fund the policy, where a couple of years later, of course the bank account is a much smaller piece of your life and the policies are a much larger piece of your life.

So what I believe the answer to the question oftentimes is if you set yourself up in the true pure IBC fashion, then it will almost always make sense to use policy loans for most things. If you have set yourself up in a bit of a more conservative approach to IBC, this question will come up because there will be money outside of your policies to be able to pay for things, and then you’ll have this question of this tug and pull. If you are uncomfortable with my options to situate yourself in a way that it makes sense, then oftentimes you will, my suggestion would be to just go ahead and use cash to do it. In a real IBC form, there are ways to get money into policies and then pull it from policies to where you actually profit by doing so.

We have a video that shows that, as I already mentioned, livingwealth.com, go to the Wealth Creation Resources, go to the Webinars tab and to record in their Policy versus Cash, somewhere in there, in those training videos. And so we’ll dive into, yeah, you’ll make more money if you set yourself up that way. And it’s a very simple video. In real life, it’ll be more complex, but we’re here to help with that. So you can either go ahead and use policy to do it if that allows you to fund a new policy or increase premiums on existing ones depending on where you’re at and how much room you have in your MEC space and so forth.

The other thing we found too is that this type of thing even works if you’re going to quote unquote refinance money you’ve already spent. So you also talked to clients who said, Nate, I had a big house remodel, or I bought a big piece of equipment, or I bought whatever it is, and it was $50,000, $75,000, $100,000, but I actually had cash in my bank account to do this, so I just paid cash for it. I didn’t even use my policies. I felt like I should have, but I didn’t really understand. I had enough money so I just went ahead and paid cash for it. Well, did I make the wrong decision? I would say essentially, no, you didn’t make the wrong decision. You shouldn’t have used a policy loan to pay for those things if you had cash sitting on the sidelines.

However, we could essentially refinance those purchases with a policy loan, so we could pull out $100,000, maybe it was an investment they made, maybe it was a purchase they made. It was something where they used cash to do it because they had cash. What I’m saying is it could make sense. The only reason it would ever make sense to use a policy is if you are finding a way to get that money that was not a part of the policy system into the policy system. So that’s why I would say it could make sense to refinance that purchase or that investment that was made by pulling out a policy loan even after the fact, and then use that money to start and capitalize a brand new policy over time. We borrowed out $100,000, we put in $25,000 a year for four years into a brand new policy and we pay back the $100,000 policy loan over time with money that would have normally accumulated in the bank account because that’s where that money was situated.

But if you can’t tell at the end of that four or five years, they would’ve had a brand new policy fully capitalized and they would’ve been using that excess cash to pay back the policy loan system. So at the end of that timeframe, they’ll come to a new investment, they’ll come to a new expense and they won’t even ask the question because they have changed where their financial position is. So now they’ve got the $100,000 back into their first policy and they have $25,000 of premium paid for four years into that new policy that they started. So four years later, the money that would’ve been accumulating in a bank account because of them living on less than they make, and what I’m trying to bring up is that’s where the money would’ve came from.

In other words, the only reason they had $100,000 to pay cash for the investment or for the expense or whatever it is, the only reason that that money was in a bank account was because they live on less than they make, money starts to accumulate in the bank account and then they can go spend it. And what we’re saying is we have now changed the position because instead of having money accumulate in the bank account, they were simply using the money that would’ve accumulated in the bank account and they were just sending chunks back to repay the policy loan that they took to fund the investment or the expense or the equipment or whatever it is, and they have this brand new policy that was paid for just from the refinancing of the expense by taking on a policy loan.

And so what we have now is a position where they’ve got $100,000 approximately. Some people watching this video will be critical and they’ll say, Nate, in the first couple of years, they’ll be paying the premium and it won’t have all the cash value. Once again, okay, it doesn’t change anything on the actual design of this, but yeah, you’re right. But what I’m trying to bring up is they would’ve put in $100,000, maybe the cash value’s $90,000 by year four, I don’t know. I mean, whatever the cash value is at that time in that policy, they would’ve replenished this one, and then what’s going to happen is they’re going to need to buy another piece of equipment, they’re going to need a down payment on a new home, they’re going to…

Whatever these things are in life, they’re going to have to come back and realize that now they have situated themselves in what I would call a more proper IBC situation, which means that their bank account is not flush with cash anymore. It’s been moved in to a policy and they’ve got a couple of policies being capitalized over on this other side and now they’re going to be pulling money from policies more often because that’s where the capital is. And so the question itself was answered by how they set up their financial position.

And so the idea of, well, should I pay policy versus cash? It’s a great question. I’ll recap where we went from today. There are ways to set up your life to where it will almost always make sense to use policy loans. But the reason it will make sense to use policy loans is not because there’s magic in the policy loans. It’s simply because that is where you have capitalized the vast majority of the money that you are accumulating. And so whenever an investment comes along, an expense comes along, a house remodel project comes along, the question won’t even really arise because you have situated yourself where the amount of liquid money available to you outside of the policy is very small, it’s very insignificant compared to the amount of money that’s inside the policies. So of course we’re going to be using policies.

I would then like to prove to you that setting yourself up that way is more profitable, of which case you can go view the video that I mentioned where we actually dive into the numbers behind that. There’s a way to situate yourself to where it almost always makes sense that’s also the most profitable way to have set yourself up as. If that is an uncomfortable reality for you, which is perfectly fine and acceptable, it’s not a cookie cutter approach, everyone has their own level of comfortability. If that’s uncomfortable for you, then unfortunately the answer will typically be, yeah, it’s likely you’ll just want to pay cash for a lot of things. So there’s no real reason, there’s no magic in policy loans. There’s no real reason to pull a policy loan out to pay for something or to make an investment when there’s money sitting in cash that is not going to be going anywhere anytime soon of any sort of value, nor is it earmarked for policies.

By the way, that’s another good point too, is that sometimes we’ll say go ahead and use a policy loan to pay for something even though you have cash, but we know that that cash is actually earmarked to pay premiums coming soon, maybe year two or year three of a policy. And so we may have some cash at the time where it’s just waiting for its turn to go into pay premiums into a policy. So it is true that there are times where you will have cash and we’ll still say use the policy, but that’s because you’re in the process of situating yourself in a way where this question will start to fall by the wayside as time goes on.

So I hope this was helpful and I hope this maybe answered some questions, especially even for those who are fairly new to it who are trying to figure out why would I ever pay interest to borrow my own money or these other types of questions. Well, I know I didn’t really dive too much into that concept. You can watch the video though and see by the way that the whole premise is that by setting yourself up this way where you’ll use policies for the vast majority of things will end up resulting in you a more profitable existence. So that’s where we’re all trying to go. Each person’s life though can be more detailed where there are reasons why we would just say, yeah, don’t start a new policy, go ahead and pay cash for it. You’re not in a situation to open a new one.

What I’m saying is it’s not a cookie cutter approach for anybody, and this is my issue. Some people are critical of me describing these kind of ideas and providing these hypothetical examples, because what a lot of people will say is they can poke holes in the hypothetical examples. But that’s what I’m saying is yeah, there are exceptions to everything. There are exceptions that you can poke holes in anything. I can poke holes… There is no strategy that exists in the world that can’t be poked holes on or some hypothetical simple example.

But what I am saying is this is the idea. The idea of IBC is not that there is some magic in policy loans, so we should just use them all the time to pay for everything just because there’s some sort of magic involved. That’s not true. In fact, it could not make sense to use policy loans to pay for something if the end result of using the policy to pay for something is just that your bank account is now flush with cash because there was already money in there to pay for that thing and you use the policy loan to pay for, but now you’ve just got a bank account that’s flush with cash and what have we done? We haven’t done anything. Now you’re just paying loan interest for fun with no corresponding added benefit that’s been created.

The idea though, however, is that if you position yourself correctly, it can make sense to use policy loans for almost everything, and not only can it make sense, the whole point is that it’s more profitable to you if you have set yourself up that way a lot of the time. If this stirs some questions for you and you want to chat with me and you have your own specific situation, I’m perfectly fine with that. You can email me anytime, nate@livingwealth.com. I’d be happy to answer your questions about your specific situation. There are ways to set yourself up in advance for those things by just paying more premium, taking cash and start paying premiums. There’s ways to do it at the moment of, as I brought in, where you could go ahead and borrow from a policy to pay for something even though you have the cash, as long as your plan is to move that cash into a new policy.

And then there’s also even ways to do it after the fact. If you’ve made an investment or if you’ve bought something, you can technically refinance those purchases with a policy loan if you wanted to, which would then put money available to you to go start a new policy, and then without any cash flow going in, we’ll just use the refinanced package. So essentially what we’ve done is we’ve recreated a scenario where we used the policy loan to pay for it and we put the money back in the bank account, then we used that money to fund the new policy and to get more capital into premium. And then over that period of time, you can slowly chip away at the loan balance with the money that will likely inevitably fill up, or used to fill up into the bank account before you set yourself up this way.

And I know I like to recap, so recap. Don’t borrow money to pay for something if the end result is just going to be a large balance of bank account money. There’s no sense in paying policy loan interest on a policy loan if all you’re going to do is sit on cash type of a bank account. We got to get that money working. One solution would be to in advance, knowing that that’s likely going to happen is to pay more premium. The other side would be let’s go ahead and use the policy to do it, but we have to move that money into premium at that point, otherwise all we have done has been paying loan interest with no added benefit.

So I hope this has been helpful. It’s been fun. By the way, as always, if you guys enjoy this show, if you enjoy this podcast, man, we would really appreciate it if you would like or review it wherever you’re consuming it, rate it, subscribe to us. We’d love to have you a more consistent part of the listenership. But this has been great. Once again, this is Nate. I’ve had a great time with you. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.

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