96: IBC Policy Loans vs. Margin Loans

096 IBC Policy Loans vs Margin Loans

[00:00:00] Hello, everyone. I'm John Montoya, and I'm John Perrings. We're authorized Infinite Banking Practitioners and hosts of the Strategic Whole Life Podcast.

John Perrings: Episode number 96, IBC Policy Loans versus Margin Loans. Welcome to the Strategic Whole Life Podcast by Authorized IBC Practitioners, formerly The Fifth Edition. And today we're going to be talking about the difference between.

Whole Life Insurance Policy Loans used when practicing the Infinite Banking Concept and Margin Loans, which are those that you would use like in a brokerage account, where you can borrow against the value of your stocks. And so we'll, talk about, three main things here.

We'll talk about third party risk, loan to value ratios, and then the assumptions that are often made, when analyzing different sources of credit. The reason I wanted to do this episode, I don't know if you've.

had similar [00:01:00] experiences lately, my guess is because interest rates are going up, I've had several conversations lately where, talking about some of the benefits of, practicing the infinite banking concept and using whole life insurance as place to strategically store cash and then use policy loans to access that cash.

I've gotten several people lately that have just blown that benefit off like they would say, yeah, I can just do that with my, brokerage account anyway. And they almost disregard the value of being able to use policy loans as part of what we do.

With The Infinite Banking Concept. And so has, any of this popped up in your practice at all, Montoya?

John Montoya: It's been a while and it seems like the majority of people who gravitate towards whole life policies [00:02:00] and infinite banking, they, they're, More preoccupied with, the other benefits that, come along with this strategy versus, potentially being able to have, their brokerage account as another financing tool.

so I'd say it's, probably been some time since I've had that conversation, with someone, but I think it's a good exercise because, at the end of the day. what we preach, it's always better to have more options, than, just being limited by, whatever you have access to.

So this makes for a good topic.

John Perrings: And. it gets to like, what are we trying to do with IBC? So you, made a great point, Montoya, about, a lot of people are looking at all the other benefits and it makes, a lot of sense because [00:03:00] what are we really trying to do with IBC? We're really taking back control.

we're taking back the, banking function, right? And the banking. The typical banking function requires us to be reliant on third parties to access capital and credit, and the Infinite Banking Concept helps us get away from that and really take true control over what we're doing and not, stock market control, not brokerage account control, not bank account control, but actual contractual control, over our financial lives.

And so the first point here is a reliance on third party credit. Everything about the standard model, works well until it doesn't. All access to credit is reliant on the permission of someone else. And we can just go back to as early as [00:04:00] 2020 when Wells Fargo started pulling home equity lines of credit. I was talking to a colleague of mine, and he was working on a a real estate development project.

And on the day that the contractor showed up to do the job, the bank pulled the credit, zero warning, and, they had to basically tell the contractors to go home. there's, just all kinds of stories that we hear in suboptimal times that, you know. I think we're doing ourselves a disservice by planning on the optimal, and we'll talk about that a little bit later.

another story, I was just on a, conference call with a bunch of people in the industry and, one of their clients was a business owner who wanted to buy. Some equipment, the bank gave him this, crazy high interest rate with lots of, payback terms, a personal guarantee. And this person actually [00:05:00] had a bunch of whole life insurance cash value saved up to the tune of a million bucks, went, took a policy loan on his own terms, bought the equipment and a year later, the bank came back with an offer he couldn't refuse.

They got rid of all the crazy terms they wanted and they got, they had an amazing interest rate. And the key here is that. it's really the cash of a whole life insurance policy that gives you the power. It's not just the loan capability. It's the fact that you're in control of it and you have the ability to use that when you need to.

And then what you find is, once, once you don't need, those third parties anymore, you find that they'll, typically come back with some different arrangements, that, that are more in your favor. I thought that was a, that was an incredible story about someone who was able to use, infinite banking for, what he needed to do, which was buy equipment for his business.[00:06:00]

John Montoya: Yeah. Control, I think, is, the main aspect that, I, would lean on and when even thinking about using, a margin loan, a margin account, against a You know, whatever assets you have in a brokerage account, the, thing I think of is what are the risks? What are the risks involved with taking that loan?

Because while it's great when the market continues to go up, there's no guarantee that every day is a green candle day. every once in a great while, because our economy is so over engineered, right? to the point of, major, crisis is, happening every once in a great while.

it happened a year ago, where the Fed, can't foresee the problems of its own creation. [00:07:00] you have the stock market. Take a huge dump. what happens when that, when you have a loan against your, brokerage account and the market decides to correct? And that's something that you need to find out for yourself if you're doing these things. But I know one thing for sure, whenever I take a policy loan, my cash value is not affected. So I can sleep pretty easy knowing that whatever happens, I've completely put a wall between this asset class and all the other asset classes that, that I've chosen to invest in. And that's the way I like to, run my personal finance. I like to have a barrier so that. I know if I take out a loan, I know what my worst case scenario is.

I can sleep at night and I don't have to play [00:08:00] risky games at all.

 That's it. that, that gets into next topic, which is loan to value ratios, what you just talked about with risk, people will cavalierly just say, yeah, I can borrow on, I can borrow against my stocks the same way I can do a policy loan.

John Perrings: That's not really true. If you analyze everything that you have to deal with when it comes to a margin loan. let me just put the caveat out there. There's probably there's a ton of different ways to, , get credit out there. So what I'm about to say is I'm sure someone could come up with an example that's different.

So of course there are going to be, Different ways to do these things. There's margin loans, there's asset based loans. and those are handled a little bit differently, but if we're looking at margin loans, which is, the thing that people came back to me with on the, on these last few appointments, first of all, you've, you, have to look at [00:09:00] the.

Effective margin. So there's, first of all, the, loan to value ratio and I'd say on average, that's probably somewhere in the 50 to 70 percent range, right? So on $100,000, you can borrow up to $70,000. there's a maintenance margin in there that if you go below a certain percentage of the equity, you're going to have a margin call.

And so if your maintenance margin is, for example, 30%, I think the average is somewhere around 25 percent to 40%, something like that. If your maintenance margin is 30%, that means your equity cannot go below $30,000, which is all you have left after you borrowed the 70 grand. you basically have zero wiggle room for the stock to go down before you start running into margin call problems.

And so the brokerage will sell your shares to overcome that, that margin call. What that means is there's actually, not only is there a limit [00:10:00] to the loan to value, which by the way, let's real quickly, the loan to value, if it's 70%, the loan, the value of what you can get in a policy loan is like in the 90 percentage range, up to 98 percent sometimes.

So right off the bat, the loan to value is much higher with insurance, but then the effective loan to value, if you want to borrow money and not risk. Actually losing, you have to have a much lower effective loan to value ratio so you can buffer against any losses in the market. And so what you find is that you actually can't.

Use the credit as much as you think you can, using margin loans,

John Montoya: Yeah. For me, I just think about where people's priorities are. And, if, I'm talking to someone who is saying, I can get this with a margin loan, go for it, and good [00:11:00] luck. I really look forward to working with people who have the same mentality and share the same, low time preference that I enjoy.

And it's in part because of these whole life policies that I do have the low time preference. but the whole idea of, taking margin loans and riding risk, it's, I don't know, it's something that just doesn't appeal to me, and I think about the priorities that I have in place with my family being number one, and the ability to access This credit, call it credit on a whole life policy because we're using the cash value as the collateral.

the, these loans are guaranteed. [00:12:00] We're never going to be turned down for a loan. And if the worst case scenario happens where let's say I have a loan outstanding, I pass away. My family isn't going to have to worry about a thing. The cash value blossoms and becomes this greater death benefit. And it's very clean accounting, but I know I'm putting my family in the best possible position and never having to take any risk whatsoever.

And I don't know, the thing I keep on thinking about is, what's going through people's minds where, they feel that, this is like whole life and IBC is a inferior option somehow because they have They're, brokerage account, and they can take margin loans. I just think where's the priority and if the priority is not, [00:13:00] separating, your assets between, risk on and risk off assets, if the priority is not putting your family first, so that you can write out whatever, curveball comes your way, then.

I would say, think about that and get back to me, because I really just want to work with people who are on the same level as me and, I, wealth, it, There's a lot of, I think preparation that, that is involved with building wealth and for people that have a high time preference and are chasing shiny rates or returns and, risky, leverage bets, taking margin loans, it's, I don't know, it's just a, definitely a different feel for what, I'm used to and, yeah, I guess that's [00:14:00] it.

Okay.

John Perrings: what you just said reminds me, we did an episode, number 39 called shopping for the money, shopping for your money. And the thing is maybe a margin loan is a good thing for you to do. You know what I mean? But the. we had Todd Langford on one of the previous episodes, the founder of Truth Concepts, and he brings up a great point about like order of operations and, like, where do you get your credit?

And if you get. If you have a bunch of cash value in your life insurance policy, that's not collateralized, and then you go get a margin loan and, things don't work out the way you hope, you still have the cash, you have the savings and the buffer to fall back on to make that margin call right for you so it's not always [00:15:00] necessarily about which, is the best place to get it?

It's about having the cash to back up whichever place you think is the best for you to get it. You've got the cash to back it up. So that's another thing to think about where it's, the, power is in creating this certainty asset that's guaranteed, it only goes up and you can use that to back up all the other things that, that you're doing.

the last point I wanted to talk about here is, I think a lot of the typical thought process, that Goes on in today's, financial thinking. It's all based on the best case scenario. No, one's really planning for the worst case scenario. They, pay lip service to it, but their actions show [00:16:00] that they're not really doing that.

And that's one of the things that Montoya and I are, really trying to tackle out there. Don't plan for the best case scenario. Don't make assumptions that things are going to work the way, people say they're going to work on like MotleyFool. com or wherever, where they're just like, Hey, put your money in an ETF and you'll get 8 percent a year, 10 percent a year, 12 percent a year, whatever they're saying these days.

 In this margin discussion, they talk about their brokerage account, like it's a savings account and they're just like, yeah, I'll just, I just have this, all this equity built up in my portfolio and I can borrow against that anytime I want, like completely. Just disregarding the fact that the, that value can go down like, 2020 didn't happen or 2008 or 2000, like all of these things, happen.

And if you want to look at. Other averages, another average is that on average, every 10 [00:17:00] years, the stock market goes down three of them. And this idea that you can just have your money in a brokerage account and borrow against it and not worry about it is baffling to me and, I was listening to a YouTube thing, maybe yesterday or today, I can't remember, but it was Dave Ramsey, who, you know, not, the friendliest person to, what we do with whole life and infinite banking, but I personally think you got to give credit where credit is due when people say things that are true and he was talking about the fact that there are There's this whole new class of real estate investors based on all the hype and I'm not blasting real estate or anything, but people are doing the same thing with real estate these days, where they just assume everything is going to be fine.

They assume, for example, that their renters will pay their mortgage for them. And, Dave Ramsey correctly said that's a horrible assumption. in the real world, there are [00:18:00] job losses, pandemics, illnesses, disabilities, cancer, all these things that can happen that could cause a tenant to not be able to pay the rent.

 What about qualified plans? Montoya, you just mentioned it. People have been conditioned, to put money into these financial instruments that require you to lock your money away for decades, and where you take all the risk and yet. You talk to the average person, they'll call that a retirement savings plan.

John Perrings: There's nothing remotely savings about that thing. It's all risk and lack of control, So I don't know. There's, there's no other asset in existence that combines the respectable growth, the tax treatment, the guarantees. And since we're talking about loans today, the leverage that you can get in a whole life insurance policy, just.

Bar none, there's nothing that, that has [00:19:00] the same qualities.

John Montoya: And add the future death benefit value as the cherry on top.

John Perrings: Exactly.

John Montoya: Yeah. Yeah, I would say, as a closing for me, it's understanding the difference between savings and investments and separating the two. And I know from experience that you'll never be in a worse place for having access to cash.

And Cash on Your Own Terms. And as Nelson taught us, you want to solve for that banking function and, beyond that, just having options, multiple options. You never want to, go out into a storm without an umbrella. And the, more coverage you have, the more access to, to, cash, , whether it's through your whole life policies, , maybe it's this personal line of credit with a bank or HELOC or, just having an abundance of options.

will [00:20:00] provide, more security in general, but to, dismiss a whole life policy, because you can leverage an asset somewhere else. I think it's really important for people to realize how you can really economize solve for a number of benefits, Within an asset that is, by far, in my opinion, the safest place where you can secure, long term savings and do it in a way that, Always puts you and your family in the best possible position because there is no volatility to ride out.

There is always guaranteed access. And when it comes right down to it, you can sleep at night knowing that at least a portion of your overall portfolio is safe and accounted for.

John Perrings: I think it was on the last episode we did [00:21:00] together, maybe episode 94. You can't build a house and start with the roof. You got to start with the foundation. And over here, John Montoya and I are experiencing torrential rainfall here in Northern California. And, I live over here in the hills and I'm always like, I'm just wondering what has to happen for houses to start, sliding down these hills.

And, when we build our houses. The things that stick out to us as important are like, , the design of the house, the kitchen, do I want a closed kitchen versus an open kitchen and living room? What's the paint on the outside of the house look like? And what's the landscaping look like?

But it's really the foundation that keeps this house on the side of the hill. And yet it's the most unseen, unappreciated part of the house. And, I feel like whole life insurance is like that. And, the infinite banking concept is like that where, it's that [00:22:00] foundation that, that really makes everything else.

Keep working because if anything comes along that, causes it to the other parts to stop working, if you don't have the foundation to keep it in place, it's not going to work anyway. It doesn't matter what color your shutters are. it doesn't matter like how nice the yard looks. you, will no longer have a house.

It'll be in the crick down the, side of the hill there.

John Montoya: Yeah. I like that. I like that. Avoid the landslides.

John Perrings: that's it. That's it. Awesome. great episode, John. thanks for, thanks for all your insight on that. And, if any of this is resonating with you, as always, you can head over to strategicwholelife. com. And you can book a free 30 minute, no obligation consultation with us right there to just see and talk about you and find out how these concepts might be able to work in your life specifically.

And if you're like one of those people, like I was that just likes [00:23:00] to learn as much as they can before talking to anyone, you can of course, get to our online course right at the top of strategicwholelife. com, our online course, IBC Mastery. And then lastly, if you, Appreciate what we're doing out here and you like our podcast. We sure would appreciate a five star review in whatever podcast platform you're using that sure would help us out. So Montoya, thanks again, and we'll look forward to seeing everybody next time.

John Montoya: All right. Thanks John. Thank you everyone. Take care.