Infinite Banking concept

[pfg1]

"His explanation", do you mean DHK? (That link is from his website)
Or are you talking about Nelson?


I didn't know that's was how Guardian works. Seems sorta counter productive really. You could borrow out all your money and earn a higher div rate than if you didn't? Or am I misunderstanding you. ?

Direct carriers have different ways of calculating, but absolutely - its a reduced div rate on borrowed funds.

And borrowing money - its a loan from the insurance company, collateralized by the cv of your policy. Its not a loan from yourself, and you aren't paying yourself back. You are paying interest to the ins company.
(which is fine, because you still have a policy with cv that is growing - albeit, maybe slightly less if dr)

 

[DHK]

I never considered the notion that amounts borrowed against a policy could just receive a lower dividend... but that does seem counter-productive.

If anything, I'm being far more conservative in my explanations. I'd rather assume that, for direct recognition policies, that there is NO earnings on the borrowed funds. Let the company be more generous, if they choose, and if it's that way in the policy.

Besides, when you pay the loan interest back to the policy, that money is credited directly back to your policy. That's your interest payment - but you're paying it back to your policy out of pocket.

 

[Lloyds of Lubbock]

I am not talking about arbitrage.
On a loaned policy from Guardian your dividend crediting rate on borrowed money is 100 basis lower than the interest rate.
That means on an 8% loan you get a 7 percent dividend. END OF STORY.
It is not done to discourage borrowing.
it is done treat all policyholders fairly and not to have one class of policyholder subsidizing another one.
"However, for dividend purposes for direct recognition policies/loans, you'll only earn dividends on the remaining UNBORROWED $50,000"
100% wrong. Direct Recognition companies pay dividends on loaned values.
In a low interest rate period the dividend payable on a loaned values is most likely higher than unloaned values.

 

[DHK]

Well, considering Guardian's 8% Fixed loan rate, I'd hope you get something out of it as it's very high for the current interest rate environment.

 

[Lloyds of Lubbock]

If you borrow out all your money yes will get a higher dividend rate, but dont forget you are being charged interest. Not a good strategy
So the increase in your dividend offsets a portion of your interest.
For simplicity sake.
You have an 8 % loan rate a 7% credit back on loaned values and a current dividend scale of 5.85.
So your values on a loan have an increase of 115 basis points.
This offsets the 8% loan rate so your net cost on a loan is 6.85.
There are other factors involved, but that is basically how it works.
Obviously you know who DHK is, My name is Jeff Kugler CLU, ChFC.
Feel free to approach Guardian and ask if any of the papers I wrote regarding the cost of borrowing are still available.
While they were done when interest rates were higher the basics still apply.
These have been checked by compliance and confirmed by the actuary department.
When Guardian was illustrating high values, companies started using Direct Rec as a competitive advantage as it was.
When interest rates are high the dividend on a loaned values is lower.
Being that this such a thrilling topic...it is actually a non issue, if you want to further this dialog send me a PM.
I will send you my phone number and we can have a conversation.

 

[DHK]

Okay, I added the following to my article:

UPDATE as of October 24, 2018: It has been brought to my attention that policies with "direct recognition" companies with loans against them still earn interest and dividends on the borrowed funds. However, I will leave it to each individual company and policy to determine how they work. Just remember that "there ain't no such thing as a free lunch". My explanations are more conservative so one can be pleasantly surprised if it is actually better than how I explained it here.

 

[Lloyds of Lubbock]

By the way Guardians current rate on new policies is 6.
So here is what that means
Your dividend on a loan is 5%....85 basis points less.
To calculate the cost of a loan you need to add this the interest rate.
Cost of a loan 6.85 familiar number?
The change from 8 % to 6% was a cosmetic change, the net to the client is the same...but you can say the interest rate is 6%.

 

[pfg1]

DHK, you have your info backwards. They pay a reduced div rate on borrowed funds, full div rate on unborrowed funds. As mentioned, its not to discourage borrowing but to level the playing field. Why should someone who hasn't borrowed against their policy, earn the same rate as someone who leveraged all their cv.

So Penn Mutual for example, they pay 2% lower div rate on borrowed funds in the early years. So if current div rate is 6.3, you get 4.3 on borrowed funds, and the full 6.3 on unborrowed. Loan rate doesn't directly come into play for them like Guardian does. I think they are at 5% iirc.

Good info on Guardian Jeff, thanks for sharing. I don't use them other than DI. Good to know how they operate.

 

[DHK]

I'm actually glad to be incorrect on this. I think I took my assumptions from an IUL and how it would treat a fixed loan rate (does not credit indexed interest on borrowed funds for a fixed interest loan) and I incorrectly applied the same concept to direct recognition policies.

 

[scagnt83]

I'm actually glad to be incorrect on this. I think I took my assumptions from an IUL and how it would treat a fixed loan rate (does not credit indexed interest on borrowed funds for a fixed interest loan) and I incorrectly applied the same concept to direct recognition policies.

Fixed Loans on IUL do not receive Index Interest, but they do receive Fixed Interest. (at least most do)

Most IUL Fixed Loans are "wash loans". Meaning they are Credited with the same rate they Charge. Most charge 3% and credit 3%, so there is a 0% net effect on the policy. (other than lost opportunity cost of no arbitrage). While wash loans are not the basis for BYOB, I think it would be more favorable vs. most direct recognition loans. (I dont think wash loans on ULs in general existed back when Nelson wrote the book)