I’ve been seeing a lot of buzz about this on social media. The idea is you put a large amount of cash into a participating mutual whole life policy, then borrow against it to pay off debts. After that, you pay yourself back into the policy, making the same payments you were sending to your creditors. The idea is, instead of paying interest to someone else, you’re paying it back into your policy. Is this for real? I’ve heard the name Nelson Nash mentioned with this.
Yes, it’s real, but not exactly the way you described it. If you have personal debts, it’s usually better to pay those off quickly before worrying about permanent life insurance.
For investment-related debts, it can offer flexibility. There are times when it makes sense to borrow, but not when assets are cheap. Permanent life can help manage cash flow against investment debt.
@Foster
That’s a good way to explain it. A lot of the time, I see this targeted at people who want to invest in real estate. They can borrow from the policy to put a down payment on a property or pay for a renovation. No credit checks or restrictions on the property, from what I understand.
@Tobin
Exactly. If you’re paying cash, there’s no credit check. If you have a large down payment, the credit check matters less. The real impact will come later, when the property starts making money.
It’s definitely a real thing, but be careful. Some agents on social media push this with the wrong products or advice.
Yes, it’s real. I used mine to pay off my car loan. The loan was at 2.9%, and the cash in my policy was earning 2.0%. The nice part is, you control how you pay it back, in any amount, or not at all. You’re not really paying yourself back though, you’re just borrowing against your policy.
@Remy
That sounds similar to what I’ve heard. So, you’re borrowing against the death benefit? I guess paying it back makes sense if you plan to keep using the policy for other debts or investments.
Whit said:
@Remy
That sounds similar to what I’ve heard. So, you’re borrowing against the death benefit? I guess paying it back makes sense if you plan to keep using the policy for other debts or investments.
You’re actually borrowing against the cash value of the policy. The cool part is, after 10 years or more, the loan cost might be offset by the cash accumulation, meaning the net cost could be zero. Plus, after 10 years, you could use it to create a tax-free income stream without paying it back. When you pass, the death benefit will cover what you borrowed plus any interest, leaving plenty for your heirs.
One thing to remember is that policy loans are different from traditional loans. With a typical loan, interest compounds monthly, and your payment goes to interest first, then principal. With a policy loan, interest compounds annually, and any payments go straight to principal. This can reduce the effective interest rate compared to other loans. Plus, you’re in control of the payment schedule.
@Vega
True about the flexibility, but the compounding frequency doesn’t make a big difference in the amount you end up paying. I used to think the same thing, and it’s a common misconception in the life insurance community. Life insurance loan interest compounds annually, while other loans usually compound monthly, but the difference in cost is minimal.
@Poe
If you want to compare the interest rates, you can calculate the effective annual rate for a monthly compounding loan using this formula: (1+i/n)^n-1.
For example, a loan advertised at 5% monthly compounding would be equivalent to 5.12% annual compounding. When you run the numbers, the difference in interest paid is so small that it’s not worth worrying about. But yes, the flexibility of life insurance loans is a big plus.
What you’re describing sounds more like velocity banking, not infinite banking.
Amalia said:
What you’re describing sounds more like velocity banking, not infinite banking.
I didn’t mention infinite banking. I was talking about self-banking. What is velocity banking anyway?
Amalia said:
What you’re describing sounds more like velocity banking, not infinite banking.
They’re two different strategies, but you can combine them for a powerful effect.