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Life Insurance Loans Simplified - Learn How To Borrow Against A Policy - YouTube
Channel: Banking Truths
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Hi this is Hutch withBankingTruths.com.
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Today we're going to talk about borrowing - specifically
borrowing against a
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life insurance policy that you designed to be your own private
family bank.
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And what you see here on the screen
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or the different parties involved up in the top left would
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be a traditional bank, over in the right would be an insurance
company,
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down on the right would be your insurance policy designed for
banking,
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and obviously on the left is your family for which whom you're
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funding the bank for.
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So the biggest advantage to borrowing against a
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policy is the fact that,
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however much you borrow your full equity is in
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there compounding for you regardless
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of how much you borrow. And people often mistake this as,
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"aren't I borrowing my own money?" And
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when I pay interest aren't I paying interest back to myself?
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And although it may feel like that and the impact of the policy
almost
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makes it seem like that's what happening.
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But technically you're not.
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What's actually happening is the
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insurance company is happy to give you a loan at any time for
any reason in
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fact they're going to put it in the contract language of the
policy that they're
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guaranteed to provide you liquidity up to the sum
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function of your cash value. Usually it's
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somewhere between 80 to 90 something percent and they're
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happy to do this because essentially they're just holding your
policy as collateral.
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They're the one that has your cash value so if you default
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you don't need to worry about paying them back.
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You just lose your policy
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and your policy equity.
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So going back to the collateral,
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even though they're holding this value as
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collateral and if you look at your statement the net surrender
value
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(NSV) will be lower so if you had one hundred thousand dollars
of
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cash value and let's just say you borrowed 80 it
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might show up like you only have twenty thousand of net
surrender value
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but actually the full balance would
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still compound for you, including the amount you borrowed.
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And that's because it never left the policy.
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Again the life insurance company is just earmarking it
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as collateral while you make the loan.
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So they're going to provide you
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with the liquidity
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and for that liquidity you're responsible you
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at least owe them interest.
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You don't necessarily have to pay interest on a schedule like
you would
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with a traditional loan.
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But we're going to talk about that in just a little bit.
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So once you get the liquidity it's going
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to come in the form of a check. So when you have this even
though other
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people discussing banking are saying hey get away from the banks
get away,
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you still have to deposit this somewhere to
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actually get the money to go use for whatever you want to use it
for be it vehicles
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or investing in real estate or investing in your business
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or some kind of family expense whatever that is.
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So the thought of completely cutting
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banks out of the picture may be a little asinine
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and really you should use banks for what they're good for.
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And that's convenience and the technology.
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The fact that they have branches online transfers
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and bill pay him what not.
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Banks are totally fine to use them for
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the convenience of moving your money but as far as parking your
reserves we suggest
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when you're talking about big dollars to use a
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policy since not only are you going to most likely get more
growth
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but there's additional benefits to whether it be a
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death benefit or other kinds of chronic
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illness, critical illness, chronic critical injury benefits,
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terminal illness... There's other benefits you can get from the
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policy not to mention whatever growth you do get would
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be sheltered from taxes so
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long as you keep some sort of this some amount of this policy in
force.
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So again although
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it may seem like you're paying yourself interest, you're not.
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You're paying the insurance company interest for
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the use of their funds but they're not they're not taking away
any
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of your funds from growing inside their coffers at
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oftentimes more generous rates than you'd find in
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an actual bank.
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So a common question I get is a 401k loan
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or kind of like borrowing against your life insurance policy
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and you already learn that one
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of the key differences with life insurance is you're borrowing
against an asset
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that continues to compound for you
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with the 401k loan it's
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actually just the opposite. So you're actually borrowing from
your 401k so
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let's just say you took a loan out from your 401k all
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of this the rest of your account would continue to stay in
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the funds that you had and hopefully grow for you.
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But they're actually going to redeem the funds they're actually
going to extract the
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money from your funds. Give it to you and that's why I say it's
a single use dollar.
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So the money that you pull from a 401k are working for you
whatever
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you're doing with those funds with life insurance.
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It could be working for you in multiple different ways.
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Well it's working for you inside the policy even
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though you have a lein against some of your cash value.
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It's also being
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used for whatever you're investing in be it real estate
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or whatever,
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but also there are these additional benefits.
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So there is as we discussed usually
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a substantial death benefit over
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and above your cash value which can go to provide liquidity your
family if you
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were to pass away prematurely even if you have a loan
outstanding.
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The insurance company would just lop off the amount of the loan
from the death benefit
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they ultimately pay out
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but also some of these policies now have
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chronic illness benefits, critical injury benefits,
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terminal illness so that they are propping up additional
benefits
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and that's why I say not only is that dual purpose money
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but it's multiple use money.
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It's like you have one dollar wearing multiple hats for you
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with a policy.
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So going
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back to some of these other parameters of the loan to value
percentage which is what
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I have listed first here, is a very big differentiator so with
the 401k loan,
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the maximum you can borrow is
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50 percent of your account value and that's only up to fifty
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thousand dollars. So when you get up to greater than one
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hundred thousand dollar account, you can still only borrow the
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50. So as your account value grows this percentage will
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get become less
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and less and less.
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With a life insurance policy,
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it really depends on a lot of factors
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but we find oftentimes it'll
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be somewhere between 70 to call it 90 percent of your account
value.
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Sometimes it'll be a little bit more sometimes to
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be a little bit less. And again this depends on how much you're
funding over
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and above the basic premium,
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whether
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or not you have any kind of highly cash value riders on the
policy,
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whether or not there's any surrender charges
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but it's usually substantially higher than what you can borrow
from a 401k.
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Both of these are a private loan
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from the standpoint of it not
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being on anybody's credit checks or any radars the fact you have
a 401k loan.
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However I was reflecting when I put this on here that to
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some degree a 401k loan is like a public loan in
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that you owe tax right.
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You owe tax on some of this balance.
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So essentially you're
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borrowing from public funds which is probably why the parameters
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and loan terms you're going to see below aren't
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nearly as favorable. And there are no additional benefits that
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I know of from borrowing from a 401k.
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So if we continue moving on here the
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payment structure of a 401k is quite rigid.
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You usually have to pay it off within 5 years
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or sooner, and it may be sooner if you
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leave your job. If you left your place of employment you
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have about 60 days I believe 90 days maybe to pay off this 401k
loan.
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And if you don't, it's deemed distribution so
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it's deemed a premature distribution.
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And so the consequences would be you owe taxes on that money
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and penalties.
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The 10 percent premature withdrawal penalty if you're
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under age fifty nine and a half.
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A life insurance loan conversely,
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there's very flexible payment terms as we're going
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to see below and the consequences for default
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are really that you just lose your policy.
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And I know that that seems quite dire.
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But what's ironic about this is when I asked
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people when I talked to people about using life insurance to
build their
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own bank they often tell me that they don't really care about
the death benefit they're
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not doing it for the death benefit. They just want maximum
performance.
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It's all about the cash.
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But yet somehow when I say hey you're losing your life insurance
policy the thing they
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didn't care about they're like really I don't know is that which
which
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I find a little bit amusing. But you know if we just compare
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and you've probably seen other videos where I talk about you
know
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paying cash is almost like a dead asset.
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So you're saving up cash and spending cash
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and saving up cash and spending cash.
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When we compare that if we just overlap that
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with saving in life insurance letting it
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compound and then doing the same cash flows
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and borrowing against the policy to hopefully
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end up at a higher place in line each
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and every time you know even if you cashed out the policy very
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early on wouldn't you be at roughly the same position
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and if you just paid cash
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and if you continue doing this for a number of years you'd
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probably be better off than if you just paid cash the whole
time.
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But at any rate let's go on to the
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duration.
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We did discuss for a 401k loan,
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it's a maximum of five years for
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us for a life insurance loan.
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I'm just going to put lifetime meaning the insureds
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lifetime because technically a lot of people don't realize this.
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Technically the loan is not against the
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cash value. So when you borrow against your
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life insurance policy although
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the insurance company is holding your cash value as collateral,
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the loan is technically against the death benefit.
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And that actually provides us some of the most flexible terms
that we're going
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to talk about here.
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So when we look at your repayment options with the 401k loan you
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have one option you have to pay very structured principal
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and interest payments with a four excuse
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me with a life insurance loan you could and you should pay
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principal and interest because what that's going to create for
you is
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a situation where you're paying simple interest on a decreasing
balance while
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earning compound interest on an increasing balance in a tax
sheltered
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environment no less.
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You want to at least do that.
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If you can't do that,
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if you can't pay principal and interest for whatever reason we
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often recommend and even help our clients schedule paying
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interest only because when they pay interest only
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they flatten the liability.
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So when you flatten the liability and pay interest only,
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it works almost like simple interest.
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So whatever loan interest you have to pay, as long as your
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paying that in a timely manner, it's not going to compound
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against you. Case in point. Let's just say that this is a ten
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thousand dollar loan at a six percent interest
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rate.
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A lot of people don't realize this but what the carrier does is
as soon
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as you borrow as soon as you and most carriers do this I should
say what
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they're going to do is they're going to tack on that interest
right
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here. So in the ten thousand dollars they're going to tack on
six
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hundred dollars and just call it your total loan balance.
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Now what's nice is if you do pay down loan interest
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or you do pay down principal then what they're going
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to do is they're going to credit you back some of that interest
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you paid depending on exactly when you paid it to
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your policy. So when you pay principal
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and interest or you pay interest only,
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this can work like simple interest.
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And again it's a recipe for success when
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you're only paying simple interest on a flat or decreasing
balance
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but you're earning compound interest on
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an increasing balance.
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Now some people for whatever reason won't be able to even
service interest
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only. So if you can't we
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do recommend that when you can that you pay these unscheduled
payments during your
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lifetime so let's just say you were investing in rental
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property and you had to make improvements. You just couldn't
afford to pay anything.
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Once those improvements were done
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and rents start coming back to you then as
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you get some cash and you build up some comfort, we recommend
starting
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to pay down that loan even if you're just doing it kind of
one-off
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and manually.
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Now even if you if you can't like let's just say you have a
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major project, you have some serious cash flow constraints
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again it's a life insurance loan
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against the death benefit. Technically as long as the the
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compounding in your cash value is growing by
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more than liability against,
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you you'll have a policy in force
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and the death benefit will pay it off.
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It's nice when you have performance
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or at least if you continue to pay premiums in
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the policy then this line will almost certainly beat this
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line.
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And we've run illustrations like that where
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it actually works out to be quite favorable for people when they
do this. Again with the 401k loan,
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you've got one option - structured principal
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and interest payments.
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So hopefully this helps to dispel some of the myths about life
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insurance policy loans. Why would I want to borrow my own money?
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Why would I want to do that when I pay myself back?
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Hopefully you see that there are some clear advantages to
utilizing
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life insurance as your own bank and that life insurance loans
aren't
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exactly like traditional consumer debt.
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And if you treat them responsibly, you can actually produce a
better result
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for yourself and your family in the long run.
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