Listener Question – Borrowing for Vacations? – Episode 178

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, best-selling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome back to the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have the president of Partners for Prosperity and best-selling financial author, Kim Butler, as our co-host today, and we’re going to do what I think we enjoy the most, and that’s answering listeners’ questions. So I’d just like to thank Ben for sending in his questions, and welcome, Kim. Hello, Todd. Happy to help. So what does Ben want to know today? Super. Ben is, I’m just going to read what he put.

[00:51] He said, We got $5,000 to $10,000 that he could pay cash with, he could put it in a life insurance policy, or he could borrow it, I guess, probably on a credit card and pay it back over time. That’s question number one. OK, so let’s stop there. And this is a great question. And there are a lot of life insurance agents out there that are talking to their clients about running their vacation money through the policy. And I have to really disagree with this. Now, it’s definitely something that could be done, especially if you had a really special family vacation, maybe it was larger than normal, you know, you want to go to Europe for a couple of weeks or, you know, large cruise or something like that, because it might be less expensive to borrow from the life

[02:00] insurance company against your policy than it would be to put it on a credit card. But there’s just a misunderstanding when that is recommended in the general sense of things, because all you’re doing is adding interest cost to your vacation. So if you truly want to be your own bank and, you know, that concept becoming your own banker from Nelson Ash, if you truly want to do that, you are better just paying cash for the vacation and then saving up the money again at interest. In other words, put the quote payback. Go ahead and put that in the life insurance policy. But if you truly have cash, you want to just pay cash for the vacation. Don’t add interest cost in the form of interest to the bank or interest to the credit card company

[02:54] or interest to the life insurance company to your vacation. Add the interest gain to your savings. So go ahead and pay yourself back at interest. In other words, take your $5,000 vacation or $10,000. Let’s use $10,000. It’s easier math. And let’s say you want to pay yourself back at 10 percent. Well, then go ahead and take the thousand dollars that you would have, quote, paid to the insurance company for use of their money and put that into your life insurance policy either as a premium or as a pay to petition. That is the more efficient way to finance vacations. A lot of times I think the marketing overgeneralizes how easy it is to put money in and out of a life insurance policy. I don’t want to go into a whole lot of detail, but it really isn’t possible to put $5,000

[03:52] in a brand new policy and then take it back out, is it? No, nor is it sometimes possible to borrow against it again right away. There are some insurance companies that want you to have the policy in existence for a year, some of them six months, but that isn’t even the point. It’s so limiting to be thinking, borrowing for vacations. What we want our clients to be doing is to be borrowing to invest. And then you have a five, six percent insurance company cost and a seven or eight or nine or 10 percent investment gain. That is the more effective thing to do with life insurance policy loans. And of course, this is only over and above what is there for your emergency slash opportunity fund. So let’s say somebody’s built up cash value of $20,000 and they’re all in a big hurry

[04:47] to borrow against it. Well, if their emergency fund number is $20,000, they should not be borrowing against their life insurance policy. That money should be there for their emergency fund. Now once they get to say $50,000, then they could borrow against their life insurance policy for $25,000, pay let’s say the life insurance company charges six percent, do a bridge loan at seven percent and make that work. Now you do have taxes you have to pay attention to and some other things, but you literally could if especially if we ignored the taxes, have like if you had 401k money or something like that to offset this with, you could have a six percent borrowing cost, a seven percent gain and get ahead.

[05:33] In fact, a lot of people make the mistake of thinking that’s only a one percent improvement when in actuality, if you’re truly having a borrowing cost of six and you’re having a gain of seven, that’s a much higher rate of return. You need a financial calculator to figure that out. So you can grab, there’s Truth Concepts app available for Android phones and there’s one coming for iPhones, but just any regular app from a financial calculator is what they’re called, financial calculator apps will do the job. So I’ll just calculate real quick, if you have a cost of six and a gain of seven, you put the six in as the present value, the seven in as the future value, the years are one and that is actually a 16, one six percent, 16.67 percent improvement in

[06:35] your position, one percent spread, but 16 percent improvement. Awesome. So I guess if we were, we again are not given direct financial advice to Ben or anyone else because we don’t have all of the figures, but if he can afford to pay for his vacation, I would think that the first thing he needs to do insurance wise is to take care of the insurance that he needs. And that can be done by using an inexpensive term policy, but a convertible term policy so that as he, you know, he can then take and start putting whatever it is, five hundred, a thousand a month, and then as his income increases, which most people does, rather than increase his lifestyle, he can convert more of the term policy into a whole life.

[07:29] Would you agree with that? Yes, absolutely. We just did a blog post on convertible term and helping people understand how helpful that is. It’s a very good strategy. And we also want to reiterate at this time how important it is to have both term insurance and whole life insurance. The old buy term and invest the difference idea, not necessary at all. You really want to buy whole life insurance and buy term insurance. And ideally, of course, still invest. And again, you may be doing your investing by borrowing against your life insurance policy to do it. Super. And again, I’d just like to you. There are so many ads and stuff that I see now that refer to investing in life insurance. What’s your opinion of that?

[08:16] Well, I don’t like the word investing and the word life insurance in the same place because I don’t really view life insurance as an investment. It’s more about a place to store cash and should be compared with cash equivalent accounts like savings accounts, money markets, you know, maybe CDs, although even CDs have a penalty for early withdrawal, which, of course, life insurance does not. And investments to me should be earning double digit rates of return. And life insurance is clearly not doing that. So this misnomer, I guess, if you will, of life insurance being investment, I think is actually a real detriment to people understanding the good that life insurance can do. Awesome. But we said we’re doing this in early 2017.

[09:05] What is a rate of return that you might be able to receive in life insurance? Yeah, you’re going to be looking at three, four, maybe four and a half percent right now. That’s without tax, of course, from the dividends of an insurance company. And as is known, but just in case people don’t understand, dividends are not guaranteed. But once they get paid, they become a part of the guaranteed cash value, which continues to rise. And most insurance companies have paid a dividend every single year for well over 100 years. We’re talking the mutual life insurance companies that you want to buy your whole life products from. So, again, it’s just a nice place to store cash. I mean, even if you hit the low point of that at three percent, that’s a lot

[09:51] better than the banks are paying and the money markets where most people store their cash. And once again, what’s the tax situation with that money? So no tax, the life insurance grows without tax and it also distributes without tax. That is actually one of the benefits of doing the loan is that that money is not taxed any differently than it would be if you got a loan from a bank. You don’t have tax taxes on money that is lent to you. It’s it’s lent to you. It’s a completely different thing than income. OK, before I get to Ben’s second question, then there’s a couple of books out there that I would like to recommend. And, Kim, the first one, I guess, would be your life insurance book. Yes. So Live Your Life Insurance is available on Amazon and it’s also on

[10:43] Kindle, of course, and as an audio book and a nice little 70 page primer on how to work with or live your life insurance. Your own life insurance while you’re living. That’s the whole point of it is to help people really understand what life insurance can do for them while they’re alive. Now, that’s a pay for book. And you also have a free book that you have made just for our listeners. Again, no one can get it but our listeners. Absolutely. And that is available only on Partners, the number four prosperity dot com slash e book. It’s not on Amazon. So it’s partners for prosperity dot com slash e book. And there’s a print version and an audio version there. And again, if everybody’s listening closely, you notice our mascot is

[11:30] voicing her opinion in the back. Yes, yes. Emma likes the books. Super. All right. Well, his second question is when talking about a savings rate, say 20 percent, is this of gross or net pay? That’s a great question. So ideally, it should be gross, but I will absolutely recognize that that is not an easy thing to pull off. So if it’s not in the cards, then let’s make it of net. And you really have to start where you can. So I know clients that are absolutely saving 20, 30 percent of their gross income, and that should be the ultimate goal. But again, you start where you can, you start saving. And the best and easiest and most automated way to save is to pay your life insurance premiums and picking back up on some of the other

[12:22] discussion that we’ve had today. Paying a life insurance premium is saving and that amount of money, even the premium, not even the pay to petition, which is the extra amount that you add on top of the premium, even the premium after the first year builds cash value almost dollar for dollar in the early years and then later years. You put in a dollar a premium and you get a dollar five and then later than that, you get a dollar ten and then a dollar fifteen and twenty in growth of cash value. So this word premium does not mean that it’s going to costs. Of course, some of it is, but those costs are early on and handled quickly. And if you look at a life insurance policy year by year by year, it typically is building more cash value than your premium

[13:15] by the second or third year, especially if you are putting in those maximum pay to petitions, which are dollars above the premium that are there in order to build cash value faster. Super. And again, this is not a show for today, but we have on some of our previous shows mentioned finding that 10 or 20 percent or maybe upping the 10 to 20 percent by taking a hard look at your taxes, maybe potentially starting a home based business, making sure that you are maximizing all of your options with a home based business that allows you to pay your children income. It allows you to deduct a lot of your mileage and things that you’re already spending money on anyway. So, again, you may be able to make that.

[14:04] I would probably guarantee most people with a 10 percent job could find at least 10 percent in savings by starting a home based business. Wouldn’t you agree? Absolutely. And if anybody needs a recommendation, the easiest thing to do is the various network marketing businesses that are out there. And if you need a recommendation for that, let us know. We have a variety of clients that serve that industry well. And the important thing there is to get connected to a product that you really, really love. And we have all kinds. We’ve got physical products and intangible products and services and a lot of different various network marketing companies and experience with them. So if somebody is curious about that, I’d be happy to share

[14:52] whatever wisdom I could in that arena. And again, the easiest way to get a question on that subject is hello at partners, the number four, Prosperity.com. Super. Well, again, thanks again for your questions. Special thanks to Kim Butler for being here and sharing her wisdom with us. This is No BS Money Guy for the Prosperity podcast. Say and take care, everybody. Thank you for listening to the Prosperity podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.