One of the best living benefits of Infinite Banking policies is your ability to access their cash values via policy loans. When you take a loan from your Infinite Banking policy, the money is lent to you by the insurance company and it comes from their general account. Your cash value remains in your policy and it continues to earn interest and dividends while collateralizing the amount of your loan. This means that the loan amount is doing double duty for you: it allows you to take care of whatever reason you had for taking the loan and that same money keeps growing inside your policy earning interest and dividends. Note: Dividends are reduced if the insurance company is a direct-recognition company. Contact us for details or check our blog “Direct Recognition and Non-Direct Recognition Companies”.
Our clients continually ask us this question: “When should we take a policy loan?” We explain that we typically consider three situations where taking policy loans is a good idea:
- You have an expected or unexpected event that you cannot accommodate out of your monthly budget. For example, you daughter is getting married, or you have an emergency and need to fix the roof in your house, or you need to purchase a new car. Under these scenarios, we recommend that you repay your loan to the insurance company as soon as financially possible either by setting up an automatic repayment schedule or by making periodic payments. When you start repaying the loan, the amount of your cash value that is collateralizing the loan is reduced by the amount of your loan repayment. This means that the cash available for new loans grows by the amount of your loan repayment.
- You see outside opportunities to create cash flow and/or generate a higher rate of return than the loan rate the insurance company is charging you. For example, provide cash flow loans to your own business in exchange for a higher interest rate than the loan interest rate that you are paying to the insurance company, invest in cash-flow generating rental properties, or bridge loans, or peer-to-peer lending. In these situations, you take advantage of putting your money in motion and using the leverage between the loan interest rate and the interest rate you are earning in those investments. This is the way traditional banks make their money and you should do the same thing with your Infinite Banking policy. Here, we also recommend you repay your insurance loan as soon as financially possible from the cash flow generated by your investments. Once you repay the loan, start the process all over again, keeping your money leveraged and in motion all the time.
- You are no longer working in your regular occupation and you are receiving from different sources less income than what your monthly budget requires. In this situation, you make needed withdrawals from your Infinite Banking policy up to your cost basis (what you have paid in premiums) and then you switch to policy loans. The idea here is to maximize your retirement income without legally having to pay taxes. Under this scenario, you don’t pay your loans back to the insurance company and when you pass away the tax-free death benefit going to your beneficiaries is reduced by the loan and interest accrued.
Another question we normally receive from our clients is that following Nelson Nash’s recommendations, they wish to pay the loan back to the insurance company at the same rate that other financial institutions are charging them. For example, the insurance company may charge 5% annual interest on their loans but the credit card company they were using charged them 12% annual interest. In this situation, the client tells us how much they can financially afford on a monthly basis to repay their loan to the insurance company. Let’s assume it is $500 per month and we run a loan amortization schedule at 5% for the duration necessary to amortize the loan. We also run another loan amortization schedule at 12% for the same duration as the 5% schedule. When the client completes the loan repayment to the insurance company, we compute the difference in total interest payments between the 5% schedule and the 12% schedule and the client sends this amount to the insurance company as an extra contribution to the Paid-Up Additions rider.
Although there are different ways to handle policy loans from your Infinite Banking policies, the process described below provides you greater control and better tracking at tax preparation time from those loans that you make to your business or to other businesses or individuals and that might have tax implications.
- Contact us and let us know the loan amount that you are requesting and from which IBC policy or policies.
- Use your loan check from the insurance company to open a personal, segregated IBC checking account.
- Select a bank that offers online banking.
- Use your current bank if possible.
- Open your account with your Social Security Number (tax ID is not required).
- Do not use the words “BANK”, “BANKING” or “FINANCE” in the name of your account.
- Deposit the insurance company loan check into your personal, segregated IBC checking account.
- All transactions pertaining to these funds should be deposited to, or paid from, the personal, segregated IBC checking account, not from your personal checking account. For making loan repayments or additional payments to the PUA rider use your personal, segregated IBC checking account.
- When you are ready to repay your loan, you tell us a range of monthly loan repayment amounts that is financially comfortable to you, let’s say $500.00. Based on that information, we provide you two amortization schedules: a) one for the insurance company loan rate, of let’s say 5%, and for the number of months necessary to pay off the loan and b) the second one for the same number of months as the first one but with a rate similar to the one you would be paying an outside financial institution, let’s say 12% and determine the difference in total interest payments between the 5% and 12% amortization schedules; let’s say $1,200.00.
- Every month, you should write a check for $500.00 from your personal, segregated IBC checking account to the proper insurance company and in the memo line of the check write “Policy # XXXX, Apply to Loan Repayment”, and when you finish paying your loan, you should write a check for $1,200.00 from your personal, segregated IBC checking account to that insurance company and in the memo line of the check write “Policy # XXXX, Apply to PUA Rider”. If you are making payments for multiple policies, make out separate checks. This will ensure your funds are allocated correctly.
If you would like to learn how you can grow a substantial amount of cash that you have access to at any time without penalties, is unrelated to the stock market, and will generate income that is not included in your tax return, visit our website at http://InfiniteBankingSimplified.com/or feel free to email us your questions at ContactUs@InfiniteBankingSimplified.com or call us toll-free at 1-844-443-8422.
Isis B. Palicio, LUTCF, MBA
Pedro A. Palicio, MBA, Ph.D.
Infinite Banking Concepts® Authorized Practitioners