Recent Policy Loan Rate Increases

[00:00:00] John Montoya: Hello everyone. This is John Montoya,

[00:00:04] John Perrings: and this is John Perrings.

[00:00:06] John Montoya: We are Infinite Banking Authorized practitioners and hosts of the fifth Edition. Episode 63. In this episode, we're gonna talk about whole life insurance policy rates. As many policy holders have been notified recently, policy loan rates have gone up as of January 1st, 2023.

[00:00:26] Is this a bad thing? We'll discuss. John, what are your thoughts? Yeah,

[00:00:31] John Perrings: a lot of people are getting letters in the mail telling them that their policy loan interest rates are going to be going up effective at the beginning of the year. And this is across the board for the most part.

[00:00:43] It's not just particular carriers. And the reason for that is interest, general interest rates are going up and I would say the, first of all, the reason we decided to do this episode in the first place is because we're obviously getting some [00:01:00] calls, asking questions about how, asking us questions about how this works.

[00:01:04] And you typically will see depending on the carrier, some carriers will offer a fixed interest rate. A lot of carriers offer variable interest rates. , a couple carriers offer both, and you can decide at the time you take the loan, which way you want to go. So for, mostly for those variable rate holders, the rates are going up and some carriers handle these increases differently so that there are carriers that just raise rates anytime they want.

[00:01:35] And then there are others that will only do it annually. And I'm sure there's some carriers that do it in between. And we wanted to do this episode because we're getting, again, we're getting a lot of calls asking about it and wondering what the effect is gonna be. on what they're doing with Infinite Banking, and obviously the first effect is that you're gonna pay [00:02:00] higher interest on policy loans.

[00:02:01] Duh. , but that's not necessarily a bad thing compared to what's going on out in the general interest rate environment. And so if we look at the prevailing interest rate environment, actually if I can, let me go back and talk about how interest rates have been looking for the past, I don't know, call it 10, 15 years and for a while for Infinite Banking.

[00:02:32] The prevailing interest rates you could get from a bank were typically significantly lower than a policy loan interest rate. Maybe as much as a couple of points lower or a couple hundred basis points lower. And so it. It was a discussion that had to be had where people were like if I can get a 3% loan from a bank, why would I borrow money from my, against [00:03:00] my policy loan, my cash value?

[00:03:02] Why would I use a policy loan at 5%? That doesn't, how does that make sense? And of course there are different answers to that. Some of them. More softer principles based. The numbers though, like of course, a 3% loan is better than a 5% loan. If all things are equal, obviously that's not the case.

[00:03:23] With p with policy loans, you have, the freedom to pay back whenever you want. There's no payback terms. So some of those benefits are there, but it was always a discussion of why wouldn't I just use a bank? And of course, John and I have talked about, shopping for your best money.

[00:03:38] And so may maybe it. The right move to use a policy loan. Maybe the best move is to use a bank loan. But we're starting to see some things change as interest rates are going up, we're starting to see. An arbitrage happened again, similar to how things were in 2000 when [00:04:00] becoming your own banker first came out.

[00:04:02] So if you read Becoming Your Own Banker by Nelson Nash, which is again, is the source material for everything we're talking about. So if you haven't read it, you need to read it. But in the book, , there was some significant arbitrage between the going bank rate you could get at a bank and what you could get from your policy loan.

[00:04:20] So in, in the book, he uses the example of buying cars or financing equipment, and so there would be the policy loan rate was lower than what it was that you could get from a bank. And so we're starting to see some shift there where that might be happening again.

[00:04:37] John Montoya: Yeah. And I think just to keep.

[00:04:40] Things simple. And especially for the people who are learning about IBC for the first time. And they may be wondering, interest rates because they are increasing. Does IBC still make sense? And one of the things I could hear Nelson still sane if he were around [00:05:00] today, is that interest rates are relative.

[00:05:02] When rates are high for borrowing, they're also gonna be higher for saving. So the fact that interest rates have increas. On policy loan rates. It's not across the board a bad thing, because what's gonna happen is that the interest rates for saving is also going to increase. Now, I know most people don't have or haven't seen what the policy rates, the dividend rates were, in the eighties.

[00:05:34] In particular, that was a really high interest rate environment. I remember looking at older policies even early in my career seeing where the dividend rates were in the eighties. And it was quite unbelievable to see that they were like 14, 16%. And that was during a high interest rate environment.

[00:05:59] Why? [00:06:00] Interest rates are relative. When rates are higher for borrowing, they're also higher for saving. So even though for policy holders right now, they've seen their policy loan rates jump from five to 5.5% or 5.7% depending on the carrier. It's relative. Again, what's gonna happen is that the maturities that the life insurance companies are investing, those premium dollars in, they're gonna roll over and they're going to roll over into long-term debt instruments that are also paying a higher yield.

[00:06:39] So what ends up happening over time is that the dividends that you receive as a policy, That come from the surplus profit, they're going to increase in step. So remember, interest rates are relative. When rates are higher for borrowing, they're higher for saving. So di the dividend scale. [00:07:00] Will start to increase in the future, you're gonna, you're gonna start to see that if you have your whole life policy.

[00:07:07] So it's not a bad thing. It doesn't mean that IBC doesn't work, because at the end of the day, what is IBC about? It's about controlling your banking function. And where is the best place where you can control that function? John and I were talking a pre-show about, VULs and we've talked about using line of credits as a potential place where you can practice IBC.

[00:07:38] We, we've talked about that in previous episodes. It's not that you can only do IBC for whole life policies and that's what whole life is meant for. Not at all. You can actually practice the banking function with other financial products, but the real question to ask is what makes whole life [00:08:00] superior to practice IBC?

[00:08:02] And what makes it superior is the fact that you have this fixed. Component of mortality costs the level premium guaranteed for life. You have the transfer of risk that is transferred from you to the insurance company. These mutual based companies that are guaranteed that every single year a cash value is going to increase in value.

[00:08:26] So you never have to worry about a margin call or you never have to worry about your underlying asset going down in value or going backwards. The, these are the reasons why we recommend only whole life for IBC, if you're gonna practice IBC, it's gotta be a whole life policy. So interest rates going up.

[00:08:47] Okay. It doesn't change anything because to your point, John shopping for the money, we all have to do that. And if you give yourself more options when you go to [00:09:00] shop for the money, you're gonna be better off as a consumer than the person who only has one option. And that's the cons, the traditional bank who gets to set the terms, the payment terms, and they're going to, say the interest rate is this.

[00:09:15] You gotta live with those terms, come hell or high water. And here's a secondary option that you can have fully under your control, cuz you are the policy owner, right? The insurance company is gonna put you first above everybody else. So if you need access to a loan, you got guaranteed access. If you need to change your payment structure to repay a loan, instead of, three years, you gotta stretch it to a fourth year or a fifth year.

[00:09:42] It's completely. Up to you own, you, you own this policy. You control your cash flow and interest rates. Again, they're just relative.

[00:09:54] John Perrings: So true. And, just getting back to the control. And [00:10:00] IBC is about, again, controlling the banking function. But what does that mean? That means.

[00:10:05] You're giving yourself options to take advantage of opportunities that come your way rather than react to them. So one of the big problems with typical financial planning is everyone's locked into a certain trajectory. They have very few options. Once the market starts doing whatever the market's gonna do they're in reaction mode.

[00:10:26] And I'm not, again we're not bashing, having some money in the market or anything like that, if that's what you wanna do. But what we're doing is we're creating options for ourselves to do whatever is best for us at the time based on what's happening. And the idea that.

[00:10:48] Well, John said something else and it and it's not about the rate, just like whole life insurance is not about the rate of return, right? It's about controlling the banking function and giving yourself the [00:11:00] ability to do all the things that the banks are gonna do for you. But under your terms, We have a reminder in here that taking policy loans, you know, does not, it's not the policy loan itself that helps your policy grow faster, right?

[00:11:20] It's the, it's paying a premium , so I was thinking of this longer way to explain it. Paying a premium is what makes your policy. It's not taking loans. And if we start to think that way and we start to go back to a savings mindset, these low interest rates were great for people borrowing money, but they're horrible for savers.

[00:11:45] All the savers out there have been getting crushed over the last decade with these insanely low interest rates. And so we're steering things back to. So I'm actually happy interest rates are going up [00:12:00] because for most people this is going to be a huge boon to most people who are who need to save.

[00:12:07] That's the number one thing. Your another way to think of this is your income, your ability to earn an income is your greatest asset. And if you can save more of that and you're incentivized to do. I think it's a great thing because as John said, interest rates are relative. So whatever the interest rates are out there to borrow money, we know we're going to be more efficient savers at the same time.

[00:12:31] And the more we save, the more opportunity. It can come our way because what does it say in the book? He who has the golden rule, he who has the gold, makes the rules. So if we can be more efficient savers using whole life insurance, which is a, just a strategic place to store cash. How much more effective can we be out there regardless of what the going rate of interest on a loan is?

[00:12:56] Yeah.

[00:12:56] John Montoya: Said. And I like [00:13:00] that we did put that reminder in our notes to discuss about taking loans does not magically help your policies grow faster. I it's definitely a misconception for a lot of new people coming into IBC. Just gotta remember, or at least try to understand that you have to separate the premium paying process from the loans that you take and repaying those loans.

[00:13:30] You have to have cash flow for both, right? And one of my rules of thumb when taking a policy loan is if I can't pay it back, I shouldn't take the loan. And this works in real life too, because, if you go to the bank asking for a. And you can't pay it back. They're gonna ask you to document your income, your assets, your f ICO scores.

[00:13:53] Why? Because it's probably a Uncollateralized loan. And so they, they [00:14:00] have they need all these verification to, to determine whether you're, a high quality borrower. Because the higher the higher credit scores you have the lower risk you are of defaulting on that loan.

[00:14:19] When you take a loan from your policy there, there's none of that verification. They, the insurance company's not gonna ask you for your income, your assets. They already did all that. Through the application. There's no f ICO score that they're gonna check. The reason being, your cash value is the collateral for the loan.

[00:14:41] And should you happen to pass with the loan outstanding, guess what? The death benefit is going to pay off that loan. And the difference is, Transfer to your beneficiaries tax free. So it's completely self completing, but you just have to keep in mind, that loan that you take from the policy [00:15:00] you need to be honest with yourself.

[00:15:02] You need to be an honest banker. One of the other tenants that we, we hit on a lot in this podcast is, Nelson would always. Encourage, not even encourage, you would demand it of you. It's one of the four things, when it comes to IBC and I was actually thinking about this earlier this week, testing myself.

[00:15:29] What are the four requirements for IBC? One, think long term. Two, don't be afraid to capitalize. Three, being an honest banker. All right. My point here, and then four. Start eliminating traditional banks from your life. You can do that when you get started with IBC because it gives you that secondary option.

[00:15:50] Now you can shop for the money and if you take a policy loan, be an honest banker. It was a good exercise this week to quiz [00:16:00] myself. What are the four things again about IBC? What are the four requirements? Oh, yeah, there you go.

[00:16:05] John Perrings: Yeah. It's such sage advice and, to, to your point.

[00:16:12] Making sure you can pay the loan back. A lot of people jump into IBC and unfortunately, all these TikTok videos and everything of people, misapplying the whole IBC principle and just talking about getting rich on whole life insurance and all this stuff. It's really unfortunate because, I'll talk to people, especially younger people who are, more on that.

[00:16:35] It gets sucked into that idea. And they're like, how soon can I take a loan? And because they're missing the whole point of the fact that it's not the loan that is making this powerful, it's a feature that we can use to make what we're doing more efficient. But it. It's not about borrowing instantly, like there, it's a real loan

[00:16:59] You know [00:17:00] what I mean? It, it's not free money out there. And so what, when you said make sure you can pay the loan back, I was it triggered in my head like, we're what we're doing with Infinite Banking, what's the book called? It's "Becoming Your Own Banker." And so if you're going to become your own banker, you need to be an honest banker like you were just saying.

[00:17:22] And so if you are going to be the banker for your own financial life, that means you have to underwrite yourself. And so I was thinking of the underwriting process and, going to a bank and qualifying for a bank loan. , we should qualify ourselves for our own, for the use of our own capital as well.

[00:17:40] We shouldn't just go out there and just, pull money out willy-nilly or bar or borrow against willy-nilly based on just whatever the whim is at the time. We should underwrite ourselves and make sure that what we're doing, the, there's cash [00:18:00] flow to pay that loan back.

[00:18:02] Agreed.

[00:18:02] John Montoya: And. Just thought of something. I had an email come in from an existing client who asked me how much cash value he had, like available loan amount. And so I checked for him and let him know and let him know what the process is, just as a reminder, how to go ahead and request a loan. And I sent him that email and then I followed up with another email 10 minutes later because it dawned on me, you know what I I told him how much he.

[00:18:31] Take out of his policy, but I didn't share one of my personal golden rules, which is, don't borrow more than 50% of your total cash value. And so I sent him that email real quick and said, my personal rule of thumb is, this 50% rule. And he replied back and said, why is that?

[00:18:55] And I said, In this email, "because life happens." And I gave [00:19:00] him a brief rundown on the situation with my wife and how having the access to additional cash values, cuz we didn't, take out 99% of our cash values to go, All in on an investment or whatever the case may be. We always keep ample reserves.

[00:19:21] Just because you have the available cash value there doesn't mean you should necessarily use all of it. Because life throws us curve balls and if we're not prepared, Man, that's when life will just spit you out. And so just a reminder for everyone. Just because you have the cash value doesn't mean that you should utilize all of it.

[00:19:45] If you absolutely. Have to. And it's a life event, of course. But I, if you're jeopardizing tomorrow for what you feel is a, is a great investment [00:20:00] today. I would caution you to really think long and hard about risking really everything. And, you shouldn't have all your eggs in one basket anyway.

[00:20:12] And for maybe some people with IBC their life savings, Make up a good amount of, cash values. Still balance it out with everything that you have in your portfolio and just always put yourself in a position where you have access to cash is my main

[00:20:32] John Perrings: point.

[00:20:33] That's awesome. And I was actually just working on a LinkedIn post because, so much of the prevailing mindset around finances is around rate of return. And it is a useful metric, of course, rate of return, but it's vulgar in a way where the. Everyone. That's the only thing people think about.

[00:20:55] So when they're looking at life insurance, they're evaluating the rate of return. And so I was thinking [00:21:00] like, what's the, how did you calculate, how did you calculate in the divorce you're going through, in your rate of return of whatever you're doing, however you're calculating, how did you calculate in a six spouse or how did you calculate in, getting in a car accident and not being able to work, for several months or maybe ever.

[00:21:19] And so this. This narrow focus on rate of return really misses a lot of what happens in life. And to your point, life happens. And how are you gonna be able to take advantage of opportunities or areas where you need some help? How can you be in the best position possible?

[00:21:40] And guess what? Cash helps a lot with that from a financial perspective, right? The. I it's a, we're getting a little bit off topic here, but it's with everything going on with the economic downturn, with layoffs, everyone [00:22:00] once again is being reminded somehow they forgot since 2008 and or two, and 2000, you and I, John, lived through both of those times.

[00:22:09] Somehow people forgot over the last 10 years that the market doesn't always go. May not be the world's id world's worst idea to have a bunch of cash sitting around so you can get by if some, if something happens to your job. And you know it, and it's unfortunate that. That people, I've had so many conversations with people over the years, over the last five years especially, where there's just been this disdain for holding onto cash because you're not earning any money on it.

[00:22:37] And meanwhile, co 2020 happens, covid happens, layoffs are happening. And now I think people are maybe remembering why. That's a good idea to hold onto some cash. And another way to talk about what John's talking about. So he has that golden rule of never borrowing more than half. I love that golden rule.

[00:22:59] And another way I'll [00:23:00] describe it or another option is, as long as you have an emergency fund, and if I could wave a magic wand, everyone have at least a year's worth of income in cash, and where's the best place to soar that, of course, whole life insurance. If you have a year's, if you have a good emergency fund, then everything over that becomes your opportunity fund.

[00:23:18] And so just two ways of saying the same thing as what John's saying, Yep.

[00:23:25] John Montoya: Totally agree. We're getting into more than what we planned in this episode, so probably a at a good point, unless you've got anything else you want to add, maybe we can close it out

[00:23:36] John Perrings: here. No, it's good.

[00:23:37] Yeah, let's close it out. And just to recap with interest rates going up, what's actually happening, so yeah, loan rates are increasing, but what we're gonna see is dividends will start. Dividends typically trail the going interest rates. So we're gonna start seeing dividends increase as well.

[00:23:54] So loan rates are higher, but saving RA savings rates are also higher. So what we're [00:24:00] saying is interest rates are relative. And so don't be concerned about the going rate. The rates are gonna be what they're gonna be out there in the world. And we're still in a good position to take advantage of things by implementing the Infinite Banking Concept.

[00:24:17] If you like what you're hearing and you want to wanna get more information, you can head over to www.TheFifthEdition.com and right there you can schedule a free 30-minute. Appointment with John or myself, and you can find out how this could apply in your life, or if you're one of those people that likes to just do all the online research first before talking to anyone, we have a 50% discount on our online course, and you can get that right at www.Thefifthedition.com.

[00:24:45] Good topic today, John. Thanks.

[00:24:47] John Montoya: Yeah, it was fun. It feels like it's been a while since we've sat down and talked and recorded an episode with the holidays. So good to get back on it. And for everyone out there, thank you so much for listening. [00:25:00] It really does mean a lot to us. And if I could encourage you to leave us a rating or review if you're getting value from.

[00:25:10] Our show. Please please do leave us a rating and review because that's what helps us to share this information with a wider audience. So thank you in advance and look forward to connecting you on the next episode, john.

[00:25:23] John Perrings: See you everybody.