Can You Buy A Car With Life Insurance? – Episode 216

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[00:03] 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 back to the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have president of Partners for Prosperity and bestselling financial author Kim Butler with us today. And we’re actually going to be addressing one of our listener’s questions, which by the way is one of our most favorite things in the world to do. So if you ever want to make us happy, send us a question. This one’s going out to Chris and I’m just going to kind of read a little bit

[00:48] of the question and we’ll go from there. I have a question I don’t think you have touched on your podcast. Since debt is finite and income and growth can be infinite, my question is, would it be better to pay for a car with a policy loan from the life insurance and include the trade in to lessen the amount taken out or would it be better to pay the agreed on the amount and take the cash from the trade in and place it in the paid up additions rider to promote growth over time? Fabulous question. And so for those of you that want to send us a question, the email is hello at partners number for prosperity dot com. And I got back to Chris and said, I need a little more information and that is what

[01:39] is the car loan interest rate that you would be paying, assuming that he got a car loan from like a credit union or a local bank. And so he answered back that it was five percent. This is a very important message for everybody, and that is that interest rates do matter. There has been some misunderstanding out in the marketplace with some of the authors that don’t truly understand how whole life really works. And that is that interest rates don’t matter. So let’s work through this and I’ll explain how and why they do. So in this case, he’s got a car loan of five percent and he is asking about borrowing from the insurance company or borrowing against cash value. Those two things are the same.

[02:32] And then also the third component was, of course, the trade in, which I’ll get to in a minute. But the third going forward component is the growth of the paid up addition rider. And so many people have learned that their whole life policies are valuable and they can be made even more valuable if they’ll add the paid up addition rider to it, which is essentially just a way to get more cash in the policy. So, Todd, in order to answer this question fully, we need the interest rates of those other two components. In other words, we got the interest rate of the car loan from the credit union. We also need the interest rate at which the cash value is borrowed against. And then we also need the interest rate at which the cash value is growing.

[03:20] And I’m just reminding everybody that both premium and paid up addition contribute to cash value. And while the insurance company does keep track of what is paid up addition cash value and what is premium cash value, for most of our clients’ purposes, it’s all one big pot called cash value. So our car loan is at 5% at the credit union. Our life insurance loan, in this case, is at 6% at the insurance company. And the cash value, paid up addition rider and regular premium built cash value, is growing at 4%. So those are our facts. 5% car loan, 6% life insurance loan, and 4% cash value growth. So do I have the facts laid out? Are we clear on the question right now? Correct. And then the main thing that we’re focusing on is are we going to choose

[04:19] which is the best way to finance and which is the best thing to do with the down payment? Yes, excellent. So that second part, let’s handle first. The best thing to do with the down payment is going to put it where your interest rate is most efficient and effective. And so in this case, if the person has, and I am going to have one caveat here, but go ahead, Todd. No, that’s my question exactly is that the down payment, which in this case, I’m assuming the down payment that they’re using is a fully paid for car. Right. So those dollars, the money that they would get for the trade-in. So let’s just put some dollars on here so we’re not confused. Let’s say it’s a $30,000 car and let’s say they have a $10,000 trade-in.

[05:14] So they’re either looking at taking the $10,000 and doing something with it or taking the 10,000 and reducing the 30,000 down to 20,000 and getting a loan, whether the loan is at the credit union or the life insurance company. So there’s an important caveat here though, and that is that this person already has an emergency fund. If this person has an emergency opportunity fund, then they should do what is most efficient and effective with that $10,000 trade-in. If this person does not have an emergency opportunity fund, then they need to put those dollars where they will be available to them in the form of an emergency opportunity, which could be in a bank or in a credit union, or it could be in their life insurance policy,

[06:00] assuming that they had room for that $10,000 in their paid-up addition writer and or in their premiums. And this is something that people forget all the time. They could actually use that $10,000 and build both premium capability as well as paid-up addition capability. And as long as the policy was not in its first year, all of that money would be going to cash value. So let’s assume that they already have an emergency fund. Then we want to use the $10,000 where it’s most efficient. So let’s look at the interest rates again. We have a 5% credit union loan, a 6% life insurance company loan, and a 4% PUA writer. Well, if you look at the two loans, you’ve got a 5% loan and a 6% loan. You are going to be better off taking the 5% loan at the credit union.

[06:57] It has less cost. Now, I know there’s many people out there that would argue that you’re putting yourself more at risk because this is a bank loan. You’re going to have to make the payments every time. They’re going to have your car collateralized, et cetera. And my answer is no, you’re not because you have the cash value of the life insurance policy already established. Remember, this person has an emergency opportunity fund in our example. That is what gives you the freedom to take on the bank loan at 5%. Why pay 6% when you could pay 5%? Now, I know it’s not a big difference, but still, that 5% loan, you still have all the flexibility because you have the cash value of life insurance that you could turn to if you needed to make payments

[07:47] on that bank or credit union loan that had a required payment schedule. So if you’re just looking at those two loans, which is all you should be looking at at this part of the discussion, take the lower interest rate. Just make sure that it’s a true 5% and that credit union or bank is not playing with the interest rates the way that they do sometimes. Clear so far? Okay. Now, we’ll talk about the second part. And again, establishing that they have an emergency opportunity fund, let’s make the loan the least expensive as possible. So we’re going to take the 10 grand and reduce the debt from 30,000 down to 20,000 because that’s 5% debt. And the reason that we want to do that instead of, as Chris asks

[08:38] in his question, taking that $10,000 and making a paid up addition rider contribution is because the paid up addition rider in today’s world, this 2017, is only growing at 4%. And again, I acknowledge there’s not a lot of difference between all of these. But over time, there is potentially more difference. And of course, over time still, 4% growth is not as good as getting rid of 5% debt, assuming there’s already an emergency opportunity fund. So take the 10 grand and reduce the 5% debt. Now you only have a $20,000 5% debt instead of a $30,000 5% debt. And if you can handle it cash flow wise, go ahead and work towards getting that 5% debt paid off rather than trying to put extra money on your

[09:31] paid up addition rider, which is only growing at 4%. Now, I don’t mean like a lot of extra payments because something that I think people get into is a habit. And if you’re in the habit, for example, of paying, say, 500 bucks to your car insurance loan and say $600 to your life insurance premium and paid up addition rider every single month, then just go ahead and keep on doing that. If you have a little bit of extra money, there’s not a big difference between a 4% paid up addition and a 5% loan cost. But truly, if you’re seeking absolute financial efficiency, you want to reduce or remove that 5% loan cost before you go overtly focused on the 4% gain. Again, with the nod that sometimes just habit and consistency is way more important

[10:23] than extra dollars here or there. And sometimes people are just very good at paying their car loans. So they might as well put the extra money into the 4% paid up addition rider. And obviously, as time goes on and the car gets paid off, then ideally they will take the $500 that was going to the car loan and put that towards the paid up addition rider also. But our message here is that interest rates do matter. You absolutely want to think through what your loan costs are, what your interest rates are, and you can know that all life insurance policies today, 2017, whole life policies are growing at approximately 4%, maybe 5% if you’re a little younger, maybe 3% if you’re a little older. That, of course, is without tax, without any additional costs against it.

[11:13] That’s a net 4% cost. That’s after the cost of the insurance, after the cost of the commission, and after the cost of running the company, because most whole life products are owned by a mutual company. So you as the policyholder and premium payer are paying for that company to be run for your benefit. We always want to remember, by law, a whole life mutual company must share all of its profits with the policyholders every single year. And so that gives us a lot of confidence in that structure and what’s going on there. And just as we’re wrapping up here, I want to reiterate that when we’re talking mutual companies, mutual life insurance companies, they do not have a lot of the problem areas that a lot of life insurance companies have.

[12:01] I saw an article the other day, oh, my gosh, all these storms are going to cause insurers problems. Yeah, property and casualty companies are going to have problems, but not a whole life company that’s a mutual company that doesn’t have any property and casualty. Also, another article was talking about how various insurers were invested heavily in bonds and what are we going to do if interest rates go up, bond values go down, et cetera. This is probably a whole other podcast. But again, it was all addressing public insurers. It was not talking about the privately owned, mutually held life insurance policy. So we can have a lot of confidence in those. They’re great places for our emergency opportunity fund,

[12:43] beautiful places for us to be storing cash, and very confident building places that we can be using for our emergency dollars, our opportunity dollars, and our habitual savings dollars. So back to you. Yeah, did we cover all the questions? We did. I think in listening to this, I was trying to think of what would be a great next resource for somebody who’s starting to follow this type of logic. And I’m thinking maybe The Interest Lies book. I love the Busting the Interest Rate Lies book. Absolutely, that’s a great suggestion. That’s on Amazon. It’s Busting the Interest Rate Lies. And if you want an audio version, that’s there as well as Kindle and a physical copy. Super. Again, keep asking questions.

[13:31] You will never know how much we appreciate them and how much fun they are for us. This is No BS Money Guy Todd Strobel. Special thanks to Kim Butler and all the folks over at Partners for Prosperity. We’ll see you all again real soon. 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.