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I could write a whole book on the many ways whole life insurance gets misunderstood. Fortunately, others already have! Instead, let’s start with a simple fact: a person can borrow against the cash value of a whole life policy; if you have a basic understanding of this, the following discussion should make sense. Regardless, I encourage you to go back and read previous articles on IBC and whole life.
Interrupted Growth & Paying Interest
Someone once said to me, “Why would I want to borrow my own money and pay interest on it?” It’s a valid question. Here’s the answer: You wouldn’t want to… necessarily. Fortunately, that is not really how it works inside a properly structured policy. Instead, you are borrowing “against” the cash value of your policy. You are not borrowing “from” the cash value of your policy.
The Scenario. Maxwell calls his insurance carrier and asks them how much cash value he has available to borrow against. They look at his cash value and tell him he can borrow $188,000. Let’s say he borrowed $20,000 against his policy and the carrier is going to charge him 5%. It is an unstructured loan, so they let you decide how much and how often you are going to pay that back. Now you think to yourself, “I can get a loan from Bob-The-Loan-Guy for 3%, so why would I borrow from here?”
Defining the terms. Uninterrupted compounding is the basic principle where something (your money) and its gains grow continuously on top of each other over time. Contrast that with standard compound growth, where each time you withdraw money or investment growth declines, that growth is interrupted. Inside your policy, the cash value grows uninterrupted. The insurance carrier sees your death benefit is worth a certain amount and the cash value is worth another amount. They are usually willing to loan you 95% of the existing cash value. The difference is they are loaning you the money from their pile, not your pile. That’s why we use the term ‘borrow against’ instead of ‘borrow from’ when we talk about taking loans inside a life insurance policy. Since they are loaning you their money, yours will continue to grow uninterrupted.
Back to the story. Our friend, Maxwell, borrowed $20,000 against his policy, but he was eight years into the life of his policy, and it was projected to grow by $25,000 that year. In nearly all outside situations, qualified money included, when you borrow $20,000 from a pile of money, you have interrupted that growth. Logically, it would only be growing off his remaining $168,000 in the policy; however, it is actually growing off of the original $188,000. Why? Because the insurance carrier is loaning you their money, not your money. In this scenario, Maxwell’s policy grew from $188,000 to $215,000 that year ($27,000 growth!). He was paying a premium of $20,000 per year, so his net growth was $7,000.
Maxwell could have borrowed the entire $188,000 and his policy still would have had a net growth of $7,000 that year. This is the power of uninterrupted compounding. Also, it should be noted that the $7,000 in growth is not taxable by the IRS.
Through a properly structured whole life policy, Maxwell gained:
- Activated uninterrupted compound growth in his policy.
- Tax-free growth inside his policy.
- The ability to loan his real estate investment business the money and then deducting the interest expense.
- Recaptured money by paying himself back, instead of a bank.
- An unstructured loan that he could decide the terms on.
- A substantial death benefit tied to the policy that would pay everything back if there were any outstanding loans, leaving plenty for his inheritors.
- Eventually, he would build up a cash value large enough to retire off of his policy, instead of through a qualified account.
Where else can this be done? Let us show you how to set up your own private family banking system using Infinite Banking strategies. Create a legacy that can last for generations to come.