Bank on Yourself or Be Your Own Bank What's the Negatives.

[Lloyds of Lubbock]

The difference is with the 401(k),
1) You cannot contribute for 6 months after taking the loan (not so with life insurance).
Not true, I have taken out loans and never stopped my contributions.
If you borrow from your 401k you should check the plan documents to know the details of borrowing.

 

[Golfnut2112]

I would just use a conservative mutual fund or ETF, using life insurance as a bank is the DUMBEST thing I ever heard of for the following reasons

1. Little or very little rate of return for the first 10 years and a very low rate of return for the next 10 years
2. If you are trying to be your own bank why pay an insurance company loan interest which can be substantial. If you are paying loan interest are you really your own bank.
3 You must keep that life insurance policy in force FOREVER!!!!

By a conservative mutual fund of ETF and you completely eliminate problem 2 and 3.

 

[pfg1]

I would just use a conservative mutual fund or ETF, using life insurance as a bank is the DUMBEST thing I ever heard of for the following reasons

1. Little or very little rate of return for the first 10 years and a very low rate of return for the next 10 years
2. If you are trying to be your own bank why pay an insurance company loan interest which can be substantial. If you are paying loan interest are you really your own bank.
3 You must keep that life insurance policy in force FOREVER!!!!

By a conservative mutual fund of ETF and you completely eliminate problem 2 and 3.

Most policies if designed and funded properly will be pushing the 5% IRR over time, tax free.
The key point about using the money (and paying interest) is the money is also earning interest at the same time. So technically if you borrow $25,000 and collateralize it with the policy - sure, you pay interest to the ins co (4-5% right now) but you also continue to earn interest on that money even as you use it. I have plenty of clients that do this.

I have a real estate guy that uses his PLI policies for down payments and renovations, etc. Takes a couple days to have money wired to his account....he uses it to do his deal, pays a little interest on it (while earning interest) and when done, puts the money back in. No questions asked, no loan ppwk, and no thousands of hoops to jump through (because he's a business owner) and taking weeks or months to be "approved". Best of all, and no structured payments while he's doing his thing. My clients that do this, love it.

Sure the policy needs to stay in force, but who puts a permanent policy in force to have it no be in force? This type planning is more of an upper level sale, not for folks just barely getting by (that might not be able to do it).
Also, down the road - with a WL you can turn it off when you're ready and don't want to fund it any longer. Also, depending on the structure and type of policy, premium payments can be very flexible along the way.

Best of all, if the client dies early it pays a great tax free db, and many have other living benefits such as critical or chronic illness benefits, should they become sick or incapacitated along the way.

It shouldn't be either or, it should be both. Invest AND have max funded life insurance, imho. They are very different products, and thus its hard to compare them accurately.

 

[DayTimer]

I would just use a conservative mutual fund or ETF, using life insurance as a bank is the DUMBEST thing I ever heard of for the following reasons

1. Little or very little rate of return for the first 10 years and a very low rate of return for the next 10 years
2. If you are trying to be your own bank why pay an insurance company loan interest which can be substantial. If you are paying loan interest are you really your own bank.
3 You must keep that life insurance policy in force FOREVER!!!!

Buy a conservative mutual fund of ETF and you completely eliminate problem 2 and 3.

1) My understanding of this concept is that "rate of return" is not the best marker of ultimate cash flow back to the owner. While one may get a higher rate of return form investing in an index fund, either in a QRP or a non-QRP than one will get from the whole life policy, the whole life policy, properly funded, will cash flow a significantly higher amount of spendable cash during the distribution phase.

2) My understanding of this concept is that while ou are paying the insurance company interest on the loan, the insurance company is still crediting the loaned amount with its share of dividends/interest. The key here is that if you borrow the money from the policy to buy the car, you not only continue to make the premium payments, but you make your car payment back into the policy at the interest rate charged by the insurance company. The true cost of the loan is therefore less than the stated interest rate, as it is actually the spread between the rate at which the loan amount is being credited by the insurance company and the rate the company is charging on the loan.

Therefore, so long as the borrower is making additional loan payments on the car loan, then there is no problem with the continues health and growth of the policy.

3) My understanding is that so long as one manages and maintains the policy correctly, then there should be no reason why maintaining the policy is not only desirable, but increasingly easy to do as the policy ages.

______________________________________________________________________

My understanding may be incorrect/inaccurate. But at this point, the above is my understanding of the concept being discussed. I'm here to learn and have an open mind. The above is what I understand to be correct. But I am a student, not a teacher. I am here to learn.

Also, I am specifically assuming a whole life policy rather than an IUL is being used, and it is a whole life policy issued by a mutual company, not a stock company.

 

[Golfnut2112]

1) My understanding of this concept is that "rate of return" is not the best marker of ultimate cash flow back to the owner. While one may get a higher rate of return form investing in an index fund, either in a QRP or a non-QRP than one will get from the whole life policy, the whole life policy, properly funded, will cash flow a significantly higher amount of spendable cash during the distribution phase.

2) My understanding of this concept is that while ou are paying the insurance company interest on the loan, the insurance company is still crediting the loaned amount with its share of dividends/interest. The key here is that if you borrow the money from the policy to buy the car, you not only continue to make the premium payments, but you make your car payment back into the policy at the interest rate charged by the insurance company. The true cost of the loan is therefore less than the stated interest rate, as it is actually the spread between the rate at which the loan amount is being credited by the insurance company and the rate the company is charging on the loan.

Therefore, so long as the borrower is making additional loan payments on the car loan, then there is no problem with the continues health and growth of the policy.

3) My understanding is that so long as one manages and maintains the policy correctly, then there should be no reason why maintaining the policy is not only desirable, but increasingly easy to do as the policy ages.

______________________________________________________________________

My understanding may be incorrect/inaccurate. But at this point, the above is my understanding of the concept being discussed. I'm here to learn and have an open mind. The above is what I understand to be correct. But I am a student, not a teacher. I am here to learn.

Also, I am specifically assuming a whole life policy rather than an IUL is being used, and it is a whole life policy issued by a mutual company, not a stock company.

The rate of return has a lot to do with cash flow.
I would love to see how many agents that sell this banking stuff actually do it themselfs. All this talk about money earning interest even though the money is being used is just silly since the money doesn’t make anything for 10 years

 

[pfg1]

The rate of return has a lot to do with cash flow.
I would love to see how many agents that sell this banking stuff actually do it themselfs. All this talk about money earning interest even though the money is being used is just silly since the money doesn’t make anything for 10 years

You are right, its not nearly as efficient in the early years....but you have to fill up the bucket with money somehow and that usually takes time. Most of the policies that are designed well will have annual cv growth equal to (or more than) the premium payment by year 3-4 typically, and often break even at 7-8. However, once you do get it rolling they become very efficient, often earning 2-3 times what your premium payment is - with no risk.
You could invest in MF's or ETF's and and end of year 10 be even or down due to market returns also. There is no guarantee there either.
Using max funded insurance, or investing...both are typically long term focused, so we can't only look at the short term.
Bottom line, there ain't no free lunch, nor is there only one way best to do things. That is why there are alot of products and services available for clients.

 

[Golfnut2112]

I bet you can pick any 20 year period using a conservative mutual and have twice as much cash then using a life policy and that is the goal, to have cash? Between the low rate of returns, loan interest and having to keep it for life is just silly. Wonder what happens when the agent who sold this great idea passes away or retires and the consumer who is in their 80’s or 90’s forgot they have to keep the policy for life lapses it? I’m sure there won’t be many because most people will this terrible concept in cash out way before that.

 

[pfg1]

I bet you can pick any 20 year period using a conservative mutual and have twice as much cash then using a life policy and that is the goal, to have cash? Between the low rate of returns, loan interest and having to keep it for life is just silly. Wonder what happens when the agent who sold this great idea passes away or retires and the consumer who is in their 80’s or 90’s forgot they have to keep the policy for life lapses it? I’m sure there won’t be many because most people will this terrible concept in cash out way before that.

You are only comparing one aspect.. ror. And sure, early on it PLI will be lower than equity based investments, but there is also very low or no risk with PLI. In order to have a more accurate comparison, you'd need to use a low / no risk market investment.This is much more comparable to a bond investment.
Most of my clients will be done paying on their policies when they retire. No issue with lapse, ever.

We've hashed this out many times Golfnut, your way of thinking is set. And no, I'm not trying to change it. IMO, having this AND equity based investments are a great fit. Its not either/or.

 

[DHK]

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[Golfnut2112]

You are only comparing one aspect.. ror. And sure, early on it PLI will be lower than equity based investments, but there is also very low or no risk with PLI. In order to have a more accurate comparison, you'd need to use a low / no risk market investment.This is much more comparable to a bond investment.
Most of my clients will be done paying on their policies when they retire. No issue with lapse, ever.

We've hashed this out many times Golfnut, your way of thinking is set. And no, I'm not trying to change it. IMO, having this AND equity based investments are a great fit. Its not either/or.

I know, what’s the old saying you can’t teach an old dog new tricks. Lol I would never use all equity I would go 70-90% bonds the balance equity, depending on the individual