104: Live and Die by the Interest Rates

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.

Episode number 104, Live by the Rates, Die by the Rates.

Hello, everyone.

Welcome to the Strategic Whole Life Podcast.

John Perrings here with John Montoya.

And in this episode, we're going to talk a little bit about rates and, how the

typical move of making decisions, around rates is usually a reactive decision.

And often when people look at, Whole life insurance, especially they

compare some rate variable to that rate variable of another financial product.

And so today we're going to talk about why you're always in a better position

when you use whole life insurance.

So today's episode, I was at the IBC think tank, I guess a month or so ago now.

And, there's a, pretty well known insurance producer.

He's actually named in, Becoming Your Own Banker as, One of the accreditations

in the front cover, Vince D'Addano was, I had a conversation with him and he, we

were talking and he made the quote of, you live by the rates and die by the rates.

And, that kind of spurred the idea for this particular, episode.

And.

What we're talking about is, when, people are evaluating whole life insurance as

a financial product, that could fit into their financial life, a lot of times

they'll take a variable like, let's start with loan rates because that was

the most common one, for the last, five to 10 years where, we just came out of an

incredibly low, interest rate scenario in the world where loan rates were very, low.

You could, I have clients that have mortgage rates at two and a half percent.

And so they'd want to compare the policy loan rate, which was depending on the

carrier, let's just say it was 5%.

a policy loan rate was twice as high.

As a typical going rate of interest, you could get from a bank.

And so they would make those comparisons and say things like, why would I ever

want to put my money into whole life insurance and pay 5 percent when I can

get two and a half percent at a bank?

And.

those, questions are of course valid, but the world doesn't

always stay the same, does it?

And so we wanted to have this conversation because of course,

now what we're seeing is, going rates of interest, from a bank are.

Significantly higher than what you can get in a typical policy loan.

So thing, rates change.

And so when you make reactive decisions based on the way rates

are now, a lot of times you can get locked into a situation that.

Become suboptimal in the future.

just look at some of the commercial real estate loans out there where they

bought properties at very low variable interest rates or, very low rates.

And now those loans are coming up and we're going to start seeing, a lot of

commercial real estate come back on the market because those things are no longer

palatable when they try to refinance it.

So all these principles are true across the financial spectrum, but when it

comes to whole life insurance, People live by the rates and die by the rates

where they make a short term decision based on what the rates are now.

and they find out that if they'd only purchased whole life insurance when

they originally were, thinking about it, and they're The financial winds change.

They find they'd find that they would actually be in a better position,

having whole life insurance, but now they don't.

So now they have to come up with another reason, to buy whole life insurance.

And now they're comparing, the current rates to whole life insurance.

And so it's a, you're always stuck in this scenario where.

you could justify to yourself where it never makes sense.

but in this episode, we want to talk about how, life insurance

always has a plus factor on one side of the equation or the other.

I think for me, taking a step back and one of the things that I learned a lot from

Nelson, but one of the things that really struck home a long time ago was what he

said about interest rates being relative.

When the interest rates are high for borrowing, they're also high for savings.

So when we look at a whole life policy, people will ask,

what is the policy loan rate?

And what, is the, return, the internal rate of return on these policies?

And they're, pretty much going to match, when interest rates are high.

In the economy, the borrowing rates, like I said, to Nelson's

point are also going to be high.

And if you were to look at the history of whole life, whole life policies,

for example, in the eighties and how they were performing, you would see

that the, borrowing rate for policy loans were double digits, but what

was matching that the, dividend scale, which was also double digits.

Interest rates are relative, making a decision on a whole life policy based

off what the policy rate is, Nelson would say you're majoring in the minors.

Interest rates are relative.

So I completely, at this point, I just dismiss it.

And, and I try to tell the story so people understand you're, majoring in the minors.

This is, if, if you're living and dying by the rates, you haven't solved the problem.

what's the problem?

You don't actually have control over your money and your financing and

you're relying on a third party.

You are literally living and dying by the rates.

That other entities are creating.

So you need to step back and realize what's going on and

solve for the problem at hand.

And, it's not that interest rates are high or low.

It's that you don't have control over your financing and you are

beholden and reliant to a third party.

And so one of the biggest things that, that.

Whole life will solve for you.

It is the ability to take back that control over your money and financing.

That's the, crux of it.

And, control is really what we're going after.

And the, rates are really just end up being noise.

That being said, I just always think of the, Seinfeld episode

where they talk about that.

that being said, what about rates though?

and if we look at whole life insurance, the rates aren't always what we think

they are, whether it's the growth rate of the policy or the loan rate.

And the, growth rate, Montoya just hit the nail on the head

where the growth rate is not.

Always going to stay the same, imagine someone that, that was looking at a

life insurance policy five years ago and passed on it because they didn't

think the growth rate was sufficient.

And as we start to go into higher interest rates and, the dividend

rate starts to trail alongside the, growing interest rates, and we

start to see, dividends paying out.

That just are way higher than anything you could get, in a, typical bank.

at that point, now this person is going to look back and be like, man, I wish I had

bought that whole life insurance policy.

and, but they didn't because they were reacting to the current rates.

And.

An interesting episode, go back to episode 82, where I interviewed Todd Langford

and he talks about an article, where it said something to the effect of, bonds

are going to destroy the investment system because bonds are now grossing 5.

3%, which is being touted as more attractive than being in the market.

And so what's interesting is, it's a couple of things that number one, again,

interest rates change, but number two is.

It tells us that people talk about getting high returns, but

people's actions actually tell us that they in fact crave certainty.

Meanwhile, life insurance, on a net basis is, doing way better than 5.

3 percent on a gross basis.

And there's a lot of kind of disconnect in people's thought

process out there in terms of what they do when it comes to the market.

Alternatives and, how they view, how they view life insurance.

the, other side of things are, the loan rates.

And so again, Ten years ago, or five years ago, say you could get a

much lower interest rate at a bank.

And so why would I ever buy life insurance?

If I could get a lower interest rate at a bank, and now here we are five years

later, and life insurance policy loan rates are looking really attractive.

And so There's always some arbitrage on one side or the other when it comes

to a whole life insurance policy.

If interest rates are very low, we would typically see, we were getting

like 40 times growth of what you could get at a typical bank when the interest

rates at a, the, interest rate you earned on your account was like 0.

1%, so life insurance was getting like 4 percent on a net basis, by the way.

there was some, there were some things.

That were beneficial there from a growth perspective.

But at that time, the loan rates were significantly higher than what you

could get at a bank as obviously, if you qualify at a bank, now things

are starting to change where you can start getting higher interest rates

on your savings account or a CD.

those are starting to get up in that four, 5 percent range.

and Which starts to compete with the growth of a whole

life insurance policy, right?

but dividends tend to trail the prevailing market rates.

So if rates continue to stay high or continue to grow, we'll start

seeing the dividend increase as well.

So I think whole life insurance will always maintain a little bit of

an edge from a growth perspective.

But what's happening now is we're seeing policy loan rates are lower than

what you can get out in the market.

And Live by the rates, die by the rates.

There are people out there that declined buying whole life insurance policies

because they were looking at specific rates and comparing those rates.

Now that those rates are in a better situation.

Now they want to buy it, but now they're, five years older and

they may not even qualify anymore.

and so the, it's always a reactive decision.

And so the best time to buy life insurance is right now when you qualify

and it only gets better from there.

Yeah, people can't wrap their minds around something that gets better every single

year for the rest of their life because, what is something, that people can point

to that gets better every single year?

It's pretty hard to, come up with some answers doing that thought experiment.

But here we have whole life, which is.

By contract guaranteed to increase in value.

It's, guaranteed to get better every single year.

And going a little bit, deeper dive into the policy loan rate.

Whatever the policy loan rate is, For from the life insurance

company, that is the nominal rate.

So what do I mean by that?

let's say, I'll just use an example of a 5% policy loan rate.

Now policy loan rates are somewhere between five and 8%,

depending on the insurance company.

So I'll just use 5% and when I say it's a nominal policy rate.

What I mean by that is the insurance company is going to calculate the interest

and do not on a daily compounding rate.

it's going to be simple interest.

So they're going to calculate the balance each day.

During the policy year, and let's say that you didn't make any loan

repayments on an outstanding balance.

your effective policy loan rate is going to hold at that 5%.

But if you're being an honest banker, you take out a loan and you start

making loan repayments, let's say once a month, like you would be forced to

do in the traditional banking system.

What's going to happen is that every single dollar of that monthly loan

repayment is going to, be, it's going to be credited against that loan balance.

So you're going to effectively be reducing that loan balance dollar for

dollar by every, monthly loan repayment.

And so what happens is at the end of your policy year on your anniversary

date, the insurance company is going to calculate The interest due, they'll

send out a statement and what you'll notice is that, your balance has gone

down because you've been making monthly loan repayments and your effective

policy rate is actually less than that 5 percent because they're only charging

you interest based off your balance.

And it's, your daily balance, but it's, calculated based off simple interest.

So dollar for dollar.

This is the best, form of financing that you can possibly get because any

traditional bank loan, you're effectively, paying compounding interest and the bank

always sets up the repayment terms so that interest gets paid first, right?

And then everything else beyond the interest.

Will then be applied to the principal.

it's, interesting, if you had the same bank loan at 5%, well

with compounding interest, you're actually paying more than 5%.

But with a policy loan, you're effectively paying less than 5%

when you're making loan repayments.

each month.

And most people miss out on that.

They, don't, quite think that far ahead, but that's exactly what's happening.

Now, you combine that with, let's say you have an internal rate of return of four

and a half percent in your policy and your policy loan rate is five percent.

You're going to do the simple mental math and you're going to

say, the, interest on my loan.

is more expensive than the growth rate on the policy.

and that's, that on face value, that might be true.

But if you were to actually run the numbers.

your, compounding rate, your effective rate of return in the policy could

actually exceed your borrowing costs.

And the reason why this is so is because within a whole life policy,

you have the compounding rate.

Of your cash value every single year to get back to that point.

It gets better every single year, regardless of whether you have a loan

outstanding, and depending on how much you borrow outta your policy.

let's say you have a hundred thousand dollars in cash value, but you borrow

50% of it, 50,000, 5% on 50,000 is what?

$2,500 a year in interest?

a hundred thousand compounding at 5% is 5,000 in interest earned.

Your interest earned is twice as much.

Your interest cost you're earning for that year, you've earned 5,

000 on 100, 000 of cash value.

And your interest calculated that's due on the loan of 50, 000 is 2, 500.

So even though your policy loan rate can be greater than your

internal rate of return, you can still have a positive arbitrage.

Your whole life policy.

There's far more to whole life and borrowing and the effective rate,

than just its nominal policy rates.

And I guess that's the point I'm trying to make there.

If I could just tack on to that, the way that I try to explain it, and this

is exactly what Montoya was saying, the, every time you make a policy loan

repayment during your policy year, you're paying down the principle of the loan.

And as opposed to having the interest added first.

The, all your payments pay down the principal and then the, insurance

company calculates and charges the interest at the end of the policy year.

And if you've made regular repayments back to that loan, you'll have paid

down, the principal on the loan, which lowers the amount that the.

The interest is calculated on.

So that's a, it's a critical part of the, how policy loan interest

works and in comparison to a typical, amortization schedule where that loan

interest is calculated in arrears.

and that makes a, huge difference if you're, making

regular repayments back to it.

And.

it just gets to the point of a lot of times, again, when people make

decisions, they're, reacting to the prevailing winds and they're not

making decisions into the future.

And so many people get burned on this, on so many different things,

financially making decisions based on what's happening right now.

In a reactive mode, rather than taking advantage of things that

are happening right now in a.

Proactive mode.

And so when you're reacting, you're always behind the curve, right?

this, we did a whole episode on my martial arts background.

If you're reacting to stuff, you're, always behind the curve.

You it's really hard to catch back up.

That's why people get sucker punched because they're, reacting to things that.

They can't really see yet.

and so you're, always behind the curve when you're making reactive decisions

to the prevailing interest rates.

Whereas if you think about the principles of what we're creating, which is an,

a financial asset that has the power of large numbers behind it, the law

of large numbers, this gives us.

Arbitrage right off the bat in the form of actuarially discounted

premiums to death benefit.

And that death benefit, we create equity in that actuarially discounted death

benefit, which creates cash value.

So we're all, we're already making a strong financial decision without,

getting into the whole interest rate game.

and When you're, again, when you're making decisions on interest rates today, you're

just making a decision that's the wrong decision about interest rates tomorrow.

get on board with a, financial product that gives you benefits, no

matter what the interest rates are.

Maybe the growth rate is better.

Maybe the loan rate is better.

It doesn't really matter.

But To Montoya's earlier thing, it's all about control.

It's less about comparing what the rates are, and it's about bringing

control back into your life and taking over the banking function.

I hear what you're saying and it makes me think of time preference.

the people that are making decisions based on what rates are today, they're

practicing high time preference.

And this whole idea of whole life, We're securing a future death benefit.

That's as low time preference as it gets, and especially because that death

benefit is going to go to someone else.

so there's so many components, to, to whole life, but just the fact that

people are making rash decisions.

Using high time preference, they can't properly plan for the future.

So it hits home when you're talking about, the, type of person who

would make a decision not to buy a whole life policy because they can

get cheaper loans someplace else.

They're, they're, they're, really not, Understanding infinite banking.

And they're not listening to the words that, that Nelson put to paper in his

book, probably haven't read his book, I would imagine, but there's so much wisdom

there and, just to step back out of the moment to practice, low time preference.

It's so crucial to future planning.

the, thing where I'll end on, this thread for me is, having options.

And we've discussed this before and always having options is a good thing.

When you back yourself in a corner where your only option is to have

to agree to a third party lender on their terms, You're stuck and that's

really when you're going to have to be practicing high time preference

because you have no other options.

whole life insurance, it's going to put you in a better position

so that you can start to think.

Many decades ahead, as Nelson would talk about, you can practice low time

preference and to, end on, for me, what we're talking about here, living

by the rates, dying by the rates, you can practice low time preference and

not have to make rash decisions because you have options at your disposal.

You can borrow from your whole life policy or choose not to, but

always better to have options.

it's great that you brought up time preference, because that actually is

where interest rates come from, is time preference, where if you have a

high time preference, you value using that money sooner, to buy something.

And if you have a low time preference, you have less of a preference to

use that money and you can actually, save that money is the, just super

basic way of saying it, but that's actually the rate of interest.

The interest is your interest in how much you want to use

that money now versus later.

The rate of interest is your rate of your desire to use money now versus later.

So it's a nice little, tie in there.

And for the, nerds out there who would really like to study the

history of interest rates, there are two books I'd like to recommend.

the first one is, The Price of Time.

And the second one is Lords of Easy Money.

you, read those two books.

It's, gonna lead you down a rabbit hole on, interest rates.

I read those two books last year and.

All I can say, to borrow from my father in law, wow.

And if you want to get really nerdy, you can, I got Murry Rothbard back

there, Man, Economy and State.

You can, you can get really deep, which is, that's, Austrian economics, which

is what, infinite banking is, based on.

And, it's really what, it's a way to put Austrian economics into practice.

awesome, John.

Thank you.

And if, for you listening out there, if this was resonating with you at

all, and you want to learn more about how the infinite banking concept or

whole life insurance could apply in your life specifically, head over

to our website, strategicwholelife.

com and you can book a free 30 minute consultation with us right there.

you can also get access to our online course.

If you're a type.

That person just likes to learn and read as much as you

can before talking to anyone.

You can go to strategicwholelife.

com and there's a link to our course IBC Mastery right

there at the top of the page.

All right, I think that wraps it up.

Thanks John Montoya.

All right.

Thank you, Mr.

Perrings.

Thank you, everyone.

Take care.