I wanted to spend a few minutes talking about a phone call I got just yesterday from a dear client who asked a very good question. He said, “I have an outstanding loan against my life insurance policy with you and I’ve just received an interest notice from the insurance company. And I’ve been ignoring those interest notices in the past couple of years. I’m wondering, do I really need to pay this interest notice because I’m just paying interest on my own money, so wouldn’t that interest come back to me? So does it make a difference? Isn’t it just a wash?”
First, when a life insurance company lends you money, they’re actually lending you their money on a preferred basis.
You are a preferred customer because you’realready a life insurance policyholder. As such, you are a partial owner of the company because this is a mutual company. It’s literally owned by the policyholders who own policies with that company. So when the insurance company lends you money, they’re not taking the money out of your policy and lending it to you. Your money continues to be at work in the investments and mortgages and loans where the insurance company has previously placed hundreds of millions and, literally, billions of dollars. So,they’re lending you their money out of their general account where it’s expected by the policyholders, by the stakeholders of the company, that they should get a rate of return on their investments just like any investment member. Any stockholder of any company expects to get a return on their money.
They expect to get a dividend or some type of return on their money. So think about a bank account that you might have at your local bank. You may have a savings account at the bank, but you also have a Visa card. And when you use your Visa card for purchases, you may get a statement saying that you owe 12% or maybe even more on the balance of that card.
And you’re not going back and saying, “Well, I’m paying interest on my own money because I have money at that bank.” They’re two separate transactions. You have money that hopefully is receiving some type of an interest factor, although it’s very little, at the bank, and then you have a separate transaction when you have a Visa card that you use.
So another example is, you have a savings balance at the bank, but you take a car loan from the bank against a car that you want to buy. Two separate transactions.
You’re not paying interest on your own money. You’re paying interest on the money that the bank lent you, which is their money.
Think about taking out a second mortgage against the equity of your house. You’re going to borrow money from the mortgage company. It’stheir money. And you’re paying them an interest rate on their loan and you need to pay back the interest and the principal.
Lastly, you take a margin loan against securities that you may own. Let’s say, a Wall Street type investment account. You could borrow money against your investment account – it’s called a margin loan – and the broker-dealer, or the investment company lends you their own money using your securities as collateral.
So when you borrow money from an insurance company, you’re borrowing their money and you’re using your life insurance as collateral in two ways. One, you’re pledging a part of the cash value as a collateralized loan or lian.
And number two, if you were to pass away, the insurance company will recover a portion of your death benefit only to the extent that you owe them money on an outstanding loan.
Now, here’s a broader application. Coca-Cola was looking at their finances – this is in the late 1980s – and they were wondering why they were going broke slowly. Now, you know that Coca-Cola is a multi-billion dollar, multinational corporation, one of the largest and most successful on the planet. And they brought in a PhD economist from Harvard, and they said, “We’re having a problem because we’re making profits all over the place, but we seem to be losing money.” He said, “Well, let’s take a look at where you’re spending money.” They said, for example, “Here’s a plant that we’re building. Here is a railroad spur that we’re adding to the plant. Here’s a new product that we’re designing. Here’s a new marketing initiative for a new flavor or a new product that we’re coming out with.”
And the PhD economists asked them, “Where are you getting the money to fund these initiatives?”
And they said, “Well, we take it out of cash. We have the cash in our treasury. We just use it.” And he said, “Are you charging yourself the cost of money?” They said, “No. We’re not going to pay ourselves back interest on our own money.” And he asked, “Why not? If you had borrowed that money from Bank of America or from the local bank down the street, you would pay them interest. So in other words, you’re respecting somebody else’s money more than you’re respecting your own.” Coca-Cola got the gist of that! They got the message and they started booking their own loans from their own treasury and paying themselves back the cost of their own capital, plus a margin for profit because that transaction represented an investment that they needed to get a return on.
So they actually started making money by putting their own money into use, whether it was a railroad spur or a plant or a product or new marketing. We actually want to make a profit. Every place we put our money, every place we invest our money, every place where we open up a new financial account of any kind, we expect to make a profit on that investment. No different with a life insurance company, no different with a life insurance policy. I want my policy to continue earning, making guaranteed returns that I was promised and also a dividend if they’re declared. In the meantime, if I borrow money from the insurance company, they’regoing to lend me money out of a separate pool, I’m going to pay them interest that will go into their general fund, and it may also go toward dividends. So in a sense, I will get some of that money back, fractionally, because the insurance company is making money in every department.
Hope that helps. Call me if you have questions and want to discuss this further. This is part of the larger conversation about the Infinite Banking Concept and why we should understand how money works, how life insurance works, how banking works, how the economy works, and how these things work together.
We can show you how to apply these principles, use them in your own business and your own family, and create more wealth, management more wealth, and be smarter with your money.
Talk to you soon. Be well and God bless.