Why You Shouldn’t Borrow Against Your Whole Life Insurance Policy – Episode 298

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[00:01] Welcome to the Prosperity Podcast. In today’s episode of the Prosperity Podcast, we’re going to be sharing something that might be a little bit contradictory, something that might shock you as a listener, and that is why you shouldn’t borrow against your whole life policy. So Kim, let’s pull the bandaid off of this sore and let’s talk about it right now. Well, I’m so grateful to bring this up because I absolutely do believe that sometimes us as a community that support the use of whole life insurance, talk about the borrowing too often, too soon, and too much. So too often, let’s address that one. I absolutely like it when my clients focus on borrowing to invest. And so if you are constantly trying to borrow too often, like for cars and vacations and

[01:02] investing in debt and all these other things, you’re going to lose the opportunity because that borrowing ability is used up to save enough money to borrow for something really, really important. Most good investments, their minimum is $50,000. And we want to make sure that we have our emergency fund monies stored and protected and not borrowed against first. So let’s say that your family’s emergency opportunity fund is $20,000. Well, then you want to have 70,000 before you borrow against it to invest. So 70 and then you’ve got your 50 and then you still have 20 left over of availability, reminding ourselves that the 70 is still in there working, but still from a borrower ability standpoint.

[01:50] And so we just want to really be conscious of what we’re borrowing against for. And I just feel like I said that sometimes it happens too often. Now, what’s the too much part? Well, too much is going against that emergency fund. So in my example, you’ve got 70 available. That does not mean you invest 70. That means you only invest 50 or 40 or whatever your emergency number is. You must keep the emergency money protected. You don’t want to borrow too much against the cash value and eliminate your emergency fund. That’s just not smart. So there’s too often too much and then too soon. And this is where, again, people are just having a year or two year old policy and they’re just barely getting some cash value and they’re wanting to borrow against

[02:42] it right away because they feel like unless they borrow against it, it’s not doing its job and that is not correct. A life insurance cash value, whole life policy cash value dividend paying from a mutual company, it can just sit there for years and years and years. I have clients that have seven figures in their cash value of life insurance and have never borrowed against it. And I have others that got to seven figures before they finally borrowed against it. So we need to get off this track of, oh my gosh, I have to borrow against it otherwise it’s not working for me. That’s not accurate. And I think along with that is, oh my gosh, if I’m not paying the paid up addition, then it’s not working.

[03:23] It’s providing that peace of mind for the emergency fund. It’s providing you the ability to earn a dividend. It’s providing you the death benefit. It might also be providing you waiver premium or long term care or some of the other riders. All of those are valuable benefits that we need to remember our whole life insurance cash value is getting for us just sitting there at the life insurance company. You know, that’s such a good point because oftentimes I think that it’s marketed in a way that it is the solution to any real estate investor or business owner or investors problems because they can just access this and quickly write a check for the problem. And it may be, but I think too often people say, you know, this is their

[04:13] scapegoat when in reality, isn’t it more of a mindset type of thing? It is absolutely. And that mindset is necessary to, first of all, view it right properly to begin with, but also to continue to back up and see the big picture and not let ourselves get too myopic with just the focus on, I have to be borrowing against this right away and that a bit of short term mentality that’s so easy for us human beings to fall into. I’m guilty of it myself as well. And yet I realize that if I’ll be patient and if I’ll have more of a long term perspective, I will get better results. That’s absolutely true. And I think oftentimes because, you know, we start our businesses and we look at our finances and we’re trying to always focus on leverage.

[05:06] And if we read some of the Rich Dad books, you know, from an early stage, we’re thinking of using other people’s money and leveraging as much as possible. But there’s something to be said about leveraging for an asset and something that’s going to cash flow versus leveraging for something that may be a convenience or something that’s a liability. And we have to be really careful when we do that. Yeah, you can pick up Robert Kiyosaki’s language in the form of a do-dad. And it’s totally fine to borrow against your cash flow of life insurance to buy a car. As an example, I’ve certainly done that. And yet, especially today with car interest rates so low, you’re probably better off just doing your car loans at a bank or a credit

[05:50] union and go ahead and save that life insurance cash value borrowing ability for a real investment that, as you said, will cash flow. That’s so much more exciting and has so much more potential, even if it may take a little bit longer to do that. And then I also hear about people using it for vacations. And I have mixed feelings about this. You’re basically just adding interest costs to your vacation. Not that that’s the end of the world. I mean, it’s certainly better to do it at the life insurance company than it is at the credit card company that may add 18 or 22% interest cost to your vacation. And, of course, if it’s just going to be a month or two, maybe that’s easier, but this idea of always borrowing against it for

[06:36] vacations, I think if that’s helpful and it’s what gets your family to actually take a vacation and that’s the only way that you can do it, then awesome. Go for it. And yet again, I will just restate that my preference is that we focus on borrowing against it for an asset, particularly for a cash flowing asset and something that will grow and keep our growth continued on. Because we know that the cash value of life insurance is going to continue on unaffected by the loan. And it does not matter whether you have paid expeditions on there or it’s a direct recognition company or a non-direct recognition company. None of that is relevant at all. Those are all minor, minor things that may make a couple

[07:19] pennies of difference here or there or somewhere. Long-term, very, very little difference. What matters is your perspective on getting your assets to continue to grow and choosing investments that are a good match for borrowed money. Because the fact is it’s still borrowed money. Yes, it may be from the insurance company against your cash value and yet it’s still borrowed money. So, we often look for cash flowing deals and that’s something that our listeners can go look for is to find cash flowing deals that they could borrow against. Again, this is over and above the emergency money number. So, you keep your emergency fund in there and I’ll encourage clients to print that statement out and put it

[08:10] on the refrigerator and circle the number and mark it liquid so that everybody’s clear this is our emergency fund number and this is here and we have it. That piece of mind does wonderful things for one’s mindset. Absolutely, absolutely it does and at least the way that I manage it is this. The emergency number for me is actually zero. Meaning, I know what that number is and so any money in excess of that, well, I put the emergency as my baseline because I’m never ever ever going to dip into that unless I have an emergency. Everything in excess is what I can actually use for the opportunities. Now, that’s just my little strategy, my way of working on it. Maybe hopefully I explained that clear enough.

[08:57] Maybe that’s a little confusing. Well, I think it’s like people that have $10,000 in their checking account but they actually might still use an old style physical checkbook and they literally mark their balance as zero and they do all the accounting as if that 10 grand wasn’t there. I think that’s what you’re meaning, right? Exactly, yeah and I do that because I never want to get to a point where I am living in a world where I’m going into my emergency fund because I sleep so much better when I know that things are just taken care of and granted emergencies happen. Hey, we just had an emergency in our family and it cost a lot of money but because we had emergency and opportunity fund, it actually hasn’t gone

[09:46] through and really affected us. Through the whole ordeal, I was totally calm because I knew we were financially fine and it made a world of difference. I’m so grateful for you. Yes, that’s what emergency money is for is to handle those emergencies and we’ve talked on this talk before about the importance of also identifying the opportunity fund because every family is going to get done quote saving for emergencies. So move off of that and switch your focus and your thought process to the opportunity fund while still knowing that emergency fund is there for you and I’m so grateful that it was and that your family can handle that emergency and move on and of course we’ll keep everybody in your family and our good

[10:34] thoughts as you handle that emergency and yet we all want to add opportunities to our thinking so that the bulk of our focus is on the opportunity side. That is so true. I think as we wrap up this episode, this truly is one of those episodes where it’s a prosperity podcast episode meaning a prosperity thinking because if we live in a world where we’re always trying to play catch up and we’re trying to keep up with others and we’re focusing on liabilities, we’re not going to be in a prosperous mindset. So as we use this episode as a checklist in our lives to establish an emergency fund and we set some personal benchmarks and they may be different from everyone on here, meaning you may want to use life insurance

[11:31] to purchase vehicles, maybe in your family that’s something you don’t do, just depends. But as you set those standards, you’re going to set a standard of prosperity that’s going to affect your life and your children’s lives and their lives and it will affect generations and so right now is a great time especially on this episode where you can draw a line in the sand and say hey I’m establishing prosperity in my life and here’s how I’m going to use the life insurance to do that. Really well said Spencer. I’m so glad you picked up on that and that’s why we love the name of the podcast. It is the prosperity podcast. Well for us, for you listeners and for us, we’re so thrilled to be a part of this.

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