Being an Honest Banker – Episode 060

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[00:00] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel with my special guest or I should say my special co-host and bestselling financial author, Kim Butler. Welcome, Kim. Hello, Todd. Happy to be here today. We’ve got a great discussion to share with everybody and I also want to give people a heads up that this weekend I’m going to record the new Live Your Life Insurance book. We have an updated, expanded version of Live Your Life Insurance and I’ll record

[00:53] that and we will make that available as a special gift to our podcast listeners. So stay tuned in the next two or three weeks and that’ll be available for you. Super. Well, today’s show is going to be on how to be and why you should be an honest banker. And Kim, I’ll let you take it from there. Wonderful. So I had a client comment this week that helped me realize the disconnect that some of us have as owners of loans. So you know, we think all the time, well, I own this particular asset and I own this particular piece of real estate, but we also own loans. Now loans are debt, so we could say that they own us, but we have a responsibility with loans that tells us something very, very important about our money.

[01:43] And that is this idea of time value of money. We could also say the idea of opportunity cost of money. We’ve talked about the seven principles of prosperity and number three is measure. So you get clear on the opportunity cost of money. And we could also use the words at interest. So these three ideas, time value of money, opportunity cost around money and at interest are very critical aspects to being an honest banker and owning or taking responsibility for your loans. So the client says to me, well, why do I want to pay my loan back? Now his question was specifically about a life insurance loan, but we could argue that it would be the same for any loan. Now, obviously, if we take a car loan out, we’re going to pay the car loan

[02:31] back because if we don’t, the banks come and repossess the cars. And if we take money from our savings account, we should also pay it back because any time we want to have a strong financial foundation, we need to have our savings account, our emergency opportunity account, if it’s at a bank or at a money market at a brokerage house full. In other words, if you decide that $50,000 is your family’s emergency money and you take $20,000 to overhaul the roof on your house, as an example, you’re going to make an effort to quote, pay that savings account back. You’re going to rebuild that savings account because for your family’s peace of mind, you decided $50,000 and we don’t think anything of that.

[03:22] Of course, I’m going to rebuild my savings account. Well, if we switch gears and we use our life insurance cash value as our savings account slash emergency slash opportunity fund, and we have the same $50,000 of cash value that we’ve built up and we’ve decided, okay, yeah, I might build more for opportunities, but for the emergency side, I want to have it at $50,000, then if we borrow against it, we know that we still have $50,000 working, but if we borrow $20,000, we only have $30,000 more available. And so under our honest banker, under our ownership of loans, under our being responsible, and under these three economic ideas of opportunity cost at interest and time value of money, we want to rebuild that emergency fund.

[04:18] We want to pay back the $20,000 loan so that we can have $50,000 available again. So let me go over it one more time, because it gets tricky, especially when it’s verbal and you can’t see anything. Well, Kim, just for a minute, if you would, just explain how a loan works on a life insurance policy, because it’s a little different than a traditional loan. I don’t know that most people understand that there is an option not to pay. That’s true. It’s different than a traditional loan in the form of payments and time at which you pay, but it’s not any different than a traditional loan in terms of interest or principle or any of the way that it works on your balance sheet. But yes, let’s get clear.

[05:09] If we’re talking about a cash value loan where you have borrowed against your cash value or you have borrowed from an insurance company and we have a $50,000 cash value and you have a $20,000 loan, you do not have to pay that $20,000 back on any schedule. You do have to pay the interest every year and interest by insurance companies is usually between four and eight percent. The four and fives are usually a variable rate interest. The eights are usually a fixed rate interest. And so you’ve got to get your interest paid every single year, but you don’t have to pay the principal. So the question is, why do you want to pay the principal? Are we good so far? Yes, and I would like to just add that the reason that they don’t require the

[05:59] payments is that they know that eventually the policy will pay out at death and it will be deducted from that death benefit, correct? That’s correct. So if you’re a 40 year old or even a 70 year old and you’re not going to die until you’re 90 or 100 or 110, you cannot leave that loan on the books that long because the annual interest will end up just aiding everything else alive. However, if you’re 90 years old, you can absolutely leave that loan on the books to be paid by the death benefit. Similar to a reverse mortgage. Yes, it does work similar to that. So let’s go back to our 40 year old as an example, who has a $50,000 cash value and takes a $20,000 loan against it or takes a $20,000 loan

[06:53] from the insurance company. Those terms are interchangeable. That person wants to pay their loan back in order to rebuild that emergency count back up to $50,000 available. The account’s been 50,000 the whole time because the 20,000 that they got in their pocket is the insurance company’s money. The 50,000 is their money and it sat there and it continued to earn dividends at 50,000, not at 30,000. But they want to rebuild, they want to rebuild the available loan balance to 50,000 and that’s why they want to pay the loan back. So there’s important knowledge that we need to have around the different types of loans. So at a life insurance company, if you borrow against cash value, then you are literally getting money from the insurance company and it’s

[07:48] against your cash value and so because of that, we can dictate how we pay it back because they have it fully collateralized. Whereas at a bank, they may have a mortgage or a car as collateral, but they don’t have cash and so the bank is going to dictate that you get them a monthly payment. Whereas at the mortgage company, sorry, at the life insurance company, you do not have to make a monthly payment or an annual payment. You have to pay your interest every year, but you don’t have to pay principal. So what we typically recommend is that people handle their loan based on what they’ve borrowed against their cash value for. And so that is an example of, let’s say it’s a car loan. So if you have a car loan that you are actually using your cash value

[08:40] of life insurance for, you should make monthly payments just like you would a regular car loan. If you have borrowed against your cash value to do a fix and flip, you don’t have to make monthly payments. You’ll have to pay the interest first for the first 12 months. It’s usually actually based on a policy year, not a calendar year. And then you don’t have to make any principal payments. And instead, when you sell the real estate, you should then go ahead and pay the loan back. And you want to pay the loan back because you are rebuilding your savings account. In other words, if you have $50,000 and that’s your emergency money that you want to have, and you borrow against it 20 grand, yes, it’s still earning

[09:22] as 50,000, but you only have 30,000 available now. And so you want to be a good owner of this loan. You want to be responsible and pay the loan back and rebuild your cash value account, just like you rebuild your savings account. Now let’s add this last element. And that is the idea of the time value of money or opportunity cost or at interest. So go back to the 1920s and 30s where your grandparents had savings accounts and they literally did, they paid themselves back at interest. And what I mean by that is if they borrowed $20,000 from their 50,000, they would actually not only pay the 20 back, they would pay 20 plus interest because they understood that money has a time value of money the

[10:18] second it gets over one day. And so in order to make an opportunity whole, you must pay back interest. And so if you’re going to borrow against your cash value, you’re paying the insurance company back interest. And that is a time value of money, lost opportunity, cost environment. The insurance company is the one that lent you that money. Now, some people like to take it even one step further and pay themselves a little extra interest also. And the way that you would do this is let’s say in our example, you have a $20,000 loan and let’s say that you are at an insurance company that charges a fixed 8%. Well, you might actually pay your $20,000 loan back at 10%. Insurance company gets eight, you get two and thereby you are taking

[11:09] care of the opportunity cost or the time value of money or this at interest issue that is part of being a good, honest banker and handling your loan from a responsibility standpoint, a honest standpoint, a, I care about me and my family as much as I do about my banker and my insurance company standpoint. Is that making sense? It makes absolute sense. And sometimes what we see is family members lending money to other family members as well. And once again, this is a place where interest needs to be charged and payments need to be made. Yes. Absolutely. And it’s a tough thing. But we want to help others handle their money right. And so family banking does suggest, and the IRS even backs this up,

[12:02] that you charge a minimal interest rate. And I think the applicable federal rate is called at the IRS. I think it’s around four and a half or 5% right now. And so that is at a minimum of what you would want to charge family members for using money. Super. Anything else you want to add before we wrap up? Nope. Super excited to go off and record our new live your life insurance book and have that available for our podcast listeners here in a couple of weeks. Super. Well, this is No BS Money Guy Todd Strobel for the Prosperity Podcast. Thanks again, Kim Butler, and take care of everybody. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit

[12:46] us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.