27
Jun
2016
The Lara-Murphy Show, Episode 19: How Policy Loans Work
For those interested in Nelson Nash’s IBC, Carlos and I get under the hood and discuss his discussion of policy loans and grocery store analogy.
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Bob,
I was disappointed with your discussion at the end of this episode regarding whether to take an auto loan from the dealer or use a policy loan for several reasons:
1) At first, you took the easy way out by saying that these low rates are sometimes in lieu of a discount on the car. While this is sometimes true, for instance pick either 0% loan or $4,000 instant cash back, often times that is not the case. In fact, with the last 2 cars I have bought (both new) I came with a check from a credit union, but the dealer was able to find a commercial lender (not directly associated with the manufacturer, GMAC/country wide for instance) with a lower rate than the credit union offered and I got all the cash back goodies as if I had paid with a brief case full of cash.
2) You then stated that even if the terms favored using the dealer finance, you might want to use the policy loan due to the collateral involved, the dealer/commercial bank collateralizing the debt using the car and the life insurance company using your policy. You stated that if you fell on hard times, you don’t want them to come take your car if that is the collateral. While this is true, you started with a presupposition that you have a policy with enough cash value to buy the car. So if you take the dealer loan and then lose your job, you could always take a policy loan each month to pay your car bill and will “profit” the net interest. Because I know you’re an “honest banker” I took this as an oversight not a “Bob-tradiction”.
I write this long reply because I have never had an IBC professional give me a good reply to what is the most financially beneficial if 1) you have a policy funded with enough to pay for the asset and 2) you can procure a loan at a lower rate than the policy loan. I don’t feel like Nash addresses this at all in his book, he gets into a discussion about paying the interest to yourself vs a bank (but the interest is actually going to the life insurance company) and the best I have been given from an IBC practitioner I talked to was “you should not want to support fractional reserve banking by taking a loan from a commercial bank”, again completely side stepping the question. Finally, I hope this doesn’t sound like a rant, I truly do want to know if I’m missing something here and want to further discuss this topic as it relates to IBC.
Thanks for all your hard work on the liberty front!
Bryan,
I’m now to the Inifinite Banking stuff but I actually think the question is more complicated than you posed. If you have a direct recognition policy, then the interest paid on the money borrowed against your policy goes into your account. Thus the rate comparison is really how much will my account earn under the expected dividend from having the life insurance company invest it and how does that compare to what I will pay to myself under a policy loan.
I’m also curious about another feature of these policies. In Be Your Own Banker, Nash compares one of these policies to opening your own grocery store. If I want to own a grocery store, I don’t necessarily need to start one. I can buy one. So that made me think that their must be a secondary market for these policies. I looked and found some. But the secondary market appears to be limited to people interested in collecting on the death benefit from someone likely to die.
I have seen lots of people saying that whole life policies are horrible investments. I’ve seen people saying that they want to get out of their whole life policies and put their cash value to work elsewhere. That suggests to me that perhaps you can acquire policies for marginally more than their cash value from someone who wants to get rid of theirs. So why not buy these instead of starting your own?
You can immediately borrow the cash value. Thus from a cash flow perspective, you have only seen your cash decrease by the amount of the premium above the cash value you paid to someone who wanted out of their contract. But I can’t seem to find a market for these sorts of buyouts. That suggests to me that I might be missing something.
What are your thoughts?
I’m curious as well. The idea of funneling tax liabilities through the ibc policy is interesting, only as long as the interest rate is manageable. There’s very little out about that.
I’m also interested in hearing about IBC in other countries (EUR) and finally, on the subject of Gold-Based Whole Life policies, where the Life Insurance company and the end user take on opposite sides of the devaluation risk.