Paying Extra Interest

- Hi, everybody, this is John Montoya.

- And this is John Perrings.

- We're authorized Infinite Banking practitioners and hosts of "The Fifth Edition". Episode 42: Paying Extra Interest. So in this episode, we're gonna be talking about how best to pay the interest on your loans, what it means, and actually what Nelson meant by paying extra interest. One of the questions that we typically get quite often is does repaying a loan help your policy grow faster? So we'll cover that as well. And we'll also cover how best to repay your loan. So a lot of good stuff in this episode, it'll probably be short to the point and from all the feedback from all of you guys, I think that's the way you guys like it. So John let's jump right into it, and maybe starting with the quick rules of thumbs on policy loans and loan repayments.

- Yeah, I agree, it is a simple process. And once you understand what Nelson Nash was referring to by paying extra interest, it becomes very clear what the right path to follow is. And so, some quick rules of thumb. Policy loans are really the most consumer-friendly loans you can get out there, right? There's no verification of income, there's no verification of assets, they don't check your credit score, they're safe. There are no margin calls or freezing of the lines of credit, like we saw during COVID by Wells Fargo most notably. The loans are guaranteed against the cash value, which it acts as the collateral. And again, the cash value is just the present value of that death benefit. So indirectly the cash value collateralizes the loan. And most importantly, there are no payback terms. So unscheduled repayments is another way to say that. You choose to pay how much you repay, and when. When you start comparing some of the different sources of capital out there using lending, what's the going rate of interest from a bank loan, where there are no payback terms? And the answer is, that doesn't really exist. So something to think about when comparing different types of loans, where in a previous episode, we talked about shopping for money. And these are some of the things to think about when we look at our sources of capital.

- Yeah, and I'd say the biggest takeaway from these rule of thumbs on policy loans and loan repayments is that we are in total control. We are taking ownership of the lending and borrowing process and taking that away from the banks. So we're controlling the banking function, and that's really paramount to understanding what Infinite Banking is all about. So if you understand the basics on why IBC is so important, you're really going to further your understanding of how to make better use of your IBC policy. So let's jump into what did Nelson mean exactly when he wrote, "Paying extra interest,"? Because we get this question quite a bit from people who read his book, "Becoming Your Own Banker", there seems to be a lot of confusion, and I think the reason why, is because Nelson liked to teach using euphemisms, just colorful expressions that he owned and shared with people to help them understand IBC a different way. And if you read his book, he teaches concepts and principles in a completely different way than you'll probably ever come across. That's why you really should pick up a copy of this book and not just read it once, but multiple times in your lifetime. But this is one of the euphemisms that he shared, "Paying extra interest," that really seems to confound people the most. So what does paying extra interest actually mean? John, you wanna touch on this first?

- It's a way to think about how other interest rates are affecting what we're doing. When the book was written, he uses examples like going to the bank and getting an 8% loan for a car loan, right? And then, if you can go to the life insurance company and get a loan, a policy loan for 5 or 6%, well, what he would say is, well, if you're willing to go to the bank and pay 8%, if you're an honest banker and you want to take over the banking function, why on earth wouldn't you be willing to pay yourself 8%? Just the going rate of interest can get out in the marketplace. And so, what he would talk about is, well, if we could, if we are willing to be an honest banker and we're willing to pay ourselves 8%, just like we would a bank, wouldn't it be economically beneficial to use a 5 or 6% policy loan, and then, still pay ourselves back at an 8% rate and thereby capturing the spread and becoming an honest banker and taking over the banking function. The devil's in the details a little bit. And I think this is what, why John and I wanted to do this episode, is it's a little bit confusing on the mechanics of how that actually happens, but that's what we're talking about where, or that's what Nelson was talking about, where you're finding interest rate arbitrage is one way to put it, where arbitrage is just you're finding an advantage somewhere out there in the marketplace, where instead of paying the bank all the 8%, or you go get the money at 5% and pay yourself the difference between those two. And now you're reclaiming that banking function where you're redirecting that spread back into your life rather than have it go out to the commercial banks.

- Right, and I think what's really important to understand is that when you decide to quote unquote, pay extra interest, make a larger payment on your policy loan, what you're essentially doing is just repaying the loan at a faster rate. So if your plan was to take out a loan and pay it off in 12 months or 10 years, when you decide to make a larger loan repayment, every single dollar that you send in as a loan repayment is gonna be applied to that loan balance, meaning you're gonna pay it off even faster. So paying extra interest, depending on how you send in that premium payment or in this case, a loan repayment, how it's gonna be applied is gonna determine how quickly you pay off that loan. So I think some of the bigger confusion is if you make a larger loan repayment, it's somehow gonna build your balance or your cash value balance quicker. And that's not the case. I know that's probably leads to the next question that we get is well, does repaying a loan help grow your policy faster? And the answer is unequivocally, no, it does not. There is no magic formula, whereby if you take policy loans, your policy will grow faster. There's no universe that exists where that happens. So keep in mind when you decide to make a policy loan repayment, every dollar of that loan repayment is gonna be applied to your outstanding policy loan balance. So you're gonna pay it off even quicker, assuming your frequency and how much you send back to the insurance company as a loan repayment.

- If I could just make sure it's very clear, just because sometimes we have slips of the tongue and you mentioned a premium payment and then correct it to say a loan repayment, just to be super-clear on that. When you're paying back a loan, you're paying, you are making a loan repayment back to the insurance company. It has nothing to do with your actual premium payment. That's definitely an area of confusion that slips into the process sometimes that we have to spend some time just educating ourselves on how that works. When we take a policy loan, you're repaying that policy loan with loan payments to the insurance company. And one place where accumulation can occur is that if you schedule, let's say your bank loan would be $500 a month and your lower policy loan would be $475 a month, just to use numbers. If you follow the payment schedule and pay $500 a month all along, like John's saying, the loan will be repaid faster and you'll save some money on interest, and then you could make the decision at the end of that, to continue making that $500 a month payment, but it would actually be contributed to the Paid Up Additions. It would no longer become a loan payment. You would just have to calculate what that would be, and you would make those additional payments to Paid Up Additions, but it's not the loan that's actually doing that it's that you are now it's that you would then at the towards the end of those saved months, that you didn't have to pay loans, you could actually make additional Paid Up Additions payments.

- As long as there's room in your Paid Up Addition writer to allow for those extra PUA premiums.

- And that's why when we were talking in a previous episode, the best policies are the ones that you can pay into for the longest period of time, and that becomes a very important discussion to have with your advisor, rather than trying to front-load and stuff as much cash as you can into a short-pay policy. Do you have the room in your policy to actually become your own banker and have capital redirected back into your policy once that loan is paid off?

- So let's now discuss the best way to repay a loan. There's two ways that you can go about doing it. You can use a self-made loan interest rate to calculate a loan repayment schedule, for example, 10% over three years, or you can budget using your current cashflow to determine the frequency and the amount of your loan repayment. Which is better? It really depends on your situation. What are your thoughts there John?

- It's really about cashflow. When I'm working with people to help them determine what the best use of their money is, it's usually going to lean, unless there's some other situations going on, it's usually gonna lean towards what's gonna maintain the most cashflow for that person? A lot of people really focus on interest rates and they'll focus on interest rates, and then try to in the case of a mortgage, they'll try to make additional payments towards that low interest rate. Meanwhile, they're sacrificing cashflow for that. So general rule of thumb is what's going to maximize the most cashflow for you. And then, we can make decisions on what's gonna happen with that cashflow.

- And I have two rule of thumbs, that I'd like to share on policy loans. Number 1, never take a loan where from the outset, you have no plan to repay it. You've all heard the saying, "Failing to plan is planning to fail." And if you don't have a plan to repay your loan, you really shouldn't be taking that loan in the first place. Number 2, you wanna prioritize maxing out the Paid Up Additions for your policy year, before repaying a loan. Now that may sound a little bit weird, I guess, but here's my thinking on this. If you understand how the PUA writer works, typically with all the policies, there is a period of time, I call it, use it or lose it, where you can make contributions to the PUA writer. If for example, you have a 12-month period where that is it, that's the only time period where you can max out the Paid Up Additions writer for that policy. It's within that policy year, ending on your anniversary date. You wanna make sure that you maximize as much of that PUA writer as possible. So given the choice between contributing to your PUA or making a loan repayment with the same amount of funds, I would prioritize making a PUA payment. The reason being, when it comes to repaying a loan, remember it's unscheduled. So you can pay back that loan over 2 months or 10 years is what I always say. So I like to prioritize the PUA writer before making loan repayments. That said, remember, I go back to rule number 1, never take a loan out where I don't have a plan to repay it. So those are my two rules of thumbs on policy loans.

- Yeah, that's really interesting. And I don't think you and I have discussed that before. And I liked that, because there is that timing aspect of a PUA payment that needs to be understood when you're designing a whole life policy. So that's great. I just wanna reiterate back to the schools of thought on paying extra interest. A lot of it can be boiled down to what's available in the market. So where can you find an advantage out there? So I'm just kind of repeating what I said earlier, when you're paying yourself back, what would be the going market rate of interest if you were to get that loan from another source? And so, one of the examples I'll use when I talk to real estate people, the standard way of buying a rental property is the get 80% from the bank and you put up the other 20% in the form of a down payment. But if you were able to go and finance 100% of that deal, that 20% might come from another source, as opposed to coming from the bank, it might come from a hard money lender, might come from the seller themselves. And so, what would the going rate of interest be if you were to finance the other 20%? And if you were to go out there and do some research, you'd see, maybe it'd be around 8 to 10%, something like that. If you're now financing the down-payment on properties, if not, the whole purchase price, if you're just going to the bank for 80%, and then you wanna finance the other 20% with a policy loan. Well, that's a perfect example that would just come right out of the book, "Becoming Your Own Banker", that he uses to buy cars, except now, instead of buying a car where it's a different purchase, we're buying an asset for paying ourselves back at that 8 to 10%, rather than just the policy loan rate of 5 to 6%. Now, we're doing the same thing that we talked about earlier, and we're capturing that spread and redirecting that spread back into our life rather than not that letting that leak out into other financier's financial system, that spread now goes to our financial system to work for us.

- Yeah, basically what it boils down to is control. And we're taken ownership of our banking function and that's to keep things as simple as possible when we get into the weeds so to speak, of interest rates and calculating how much you could, you should make as a loan repayment, I like to lean towards simple is best. And for me, it's calculating what my cashflow is and driving that cashflow to the PUA and then to making loan repayments. And from there, it basically works on autopilot. I mean, this is one of the simplest systems that you can adopt, because it has the safest leverage possible. It gives you access to your cash values, your equity, whenever you want it. We never have to be worried about frozen out of our money. We have access to it whenever we want and deciding on how often and how much we wanna pay it back. That's completely up to us. So paying extra interest while it might not well, while it will not help your policy grow faster, it will recapitalize your cash values. And that's really important to understand, because the more access to cash value you have, the more opportunities you'll be able to take advantage of when it comes to multiplying your asset base, which is something that we talk about quite a bit on the show too.

- That's such a good point about recapitalizing, where what John Montoya is talking about there, is every time you make a policy loan repayment, you free back up the gross cash value that's available to use for something else. It's very much like a line of credit, but this line of credit you have control over and it's actually building another asset. So a lot of people really get into using lines of credit on their properties, nothing wrong with that, but really all you're doing right there is you're using one property. You're using the line, the value of one asset to go out there and maybe buy other assets. Well, with this, what we're doing is we're creating a third asset that we're using the value of to go out and buy other assets. So rather than just using our home like a credit card, why not create another asset that then we can use not like a credit card, because the underlying credit is guaranteed. It can never be pulled from us, it can never be shut down. And there are no payback terms on it. So getting back to what John Montoya said about control,

- Well, I like all those benefits that keeps signing me up for more, as much as the insurance companies will allow.

- Yeah, there's a guy on some of the real estate forums that he gets in and talks about Infinite Banking. He talks about how he buys a lot of real estate and he's like, "I buy more life insurance policies than I sell," even though he's an agent, because he knows he can then go out. He's just capitalizing his system, that he can then go out and buy other assets with.

- That's right, it's a reservoir of funds. And if you read Nelson's book, "Becoming Your Own Banker", he talks about how all the money in the world is connected. And he makes the analogy of the water in the world, oceans, rivers, and how everything is really interconnected. And that's the way it is with the supply of money. And there's essentially money everywhere. But if you look at who actually controls the money, it's the traditional banks, but also the life insurance companies too. And so, we want to carve out a pool of money that's completely under our ownership and control, that way we can own the borrowing and lending function for our own lives and build wealth with it. So a lot of good takeaways from this episode, I think.

- All right, I think that wraps up this episode, episode 42, the idea of paying extra interest into your policy. And if any of this information resonated with you head over to our website, our brand new website, I'll make the announcement again, thefifthedition.com. And right on there, you can leave us a review, you can get in touch with us, ask questions. You can schedule an appointment right there on our website for a free 30-minute consultation. And then, we have a new offering out there, which is our online course, which is a soup to nuts, online course regarding the fundamentals of whole life insurance. And if you go to our website, you can get a 50% discount right there on our site, if you're the type of person that likes to do a lot of research and learn a lot of this stuff on their own before reaching out to people. Okay, I think that's everything for today. Thanks everyone for joining.

- Thanks, for listening. Take care, everyone.