Borrowing money is a way of life. You are going to either borrow from someone else or you are going to borrow from yourself. We know the problems of borrowing from oneself:
- The odds of actually putting the money back are not in your favor
- If you do repay the loan, you almost never include the interest the money would have earned had you not drained the tank
However, from time to time we are all faced with the need to borrow money. Besides the obvious question about the interest rate involved in the purchase, there is another important inquiry to consider: “Do we want structured or non-structured payments on the loan?”
Structured vs. Non-Structured Loans with Clients
Structured Loans: When borrowing from most lending institutions, they will require structured payments on a timely basis. If you are ever late or miss a payment on any of your loans, you run the risk of lowering your credit score. Using OPM (or other people’s money) does allow you to maintain control of your capital if the loan does not require a collateral assignment.
Non-Structured Loans: The benefit of utilizing the loan provisions of a life insurance contract is that you have non-structured loan payments, meaning you have no timetable when the loan must be repaid. You need to pay at least the interest, but the principal repayment is at your discretion. Remember that a policy loan also reduces your collateral capacity for future loans, if necessary.
The type of payment may be even more important to your client than the interest rate charged on the loan, which is why non-structured loans may be a better option for them than a structured one.
Relating These Loans to the Private Reserve Funding Strategy Concept
Walk the client step-by-step through the Private Reserve funding strategy concept by following this script:
So let me introduce you to the Private Reserve Strategy. It’s quite simple. You have money in your private reserve, in an account you have access to that you can collateralize. You need to make a major purchase like a car, college education or a wedding. You go to a financial institution. They give you an amortizing loan. They take a collateral position against the money you have and loan you the money. You have structured principal and interest payments back to the financial institution. Notice, your money is still in your tank, still earning compound interest even on the amount of money you have collateralized. You do that over and over and that gives you use and control of your money to do whatever it is you need to do, whenever you need to do it.
Not all purchases will require that you give up collateral capacity. Being able to make major capital purchases without giving up collateral capacity is preferred when available.
The goal of this strategy is that you continue to earn compound interest on collateralized funds.
Using Permanent Insurance as a Private Reserve
Now we’re going to consider permanent insurance as your private reserve, so let’s take a look at how this works. You have money in your private reserve account. In this case it will be a life insurance contract. The life insurance company calls the cash in that contract – cash value.
You want to buy a car, so what do you do? You call/fax the life insurance company, the financial institution in this case, and ask for the money. They look at your cash value and they send you a check. At the same time they create an interest-only loan, tell you how much interest they are going to charge you and they create a lien against your collateral position (the cash value in your account) the non-pledged cash value in your policy is your remaining collateral capacity.
You are going to make payments to pay back the loan. However, with the insurance company, you’ll notice they are non-structured payments, meaning you’re not under any obligation or time period to put the money back. Now you’re going to want to put the money back as quickly as you can because any interest paid, even to the insurance company, is interest lost. And if we have an expense with interest we are paying, remember we’re not only losing the interest, but the opportunity cost on the interest as well. So to minimize the loss, we would pay back that loan as fast as we possibly can.
Notice that nothing happened to that contract. The money did not come out of the policy, and the money you pay back is not going into your policy. It’s going to the insurance company.
So permanent insurance, when designed and utilized properly – meaning not any generic or average policy, but a policy specifically designed to perform at its maximum potential – can provide stable growth, cash value for collateralization, guaranteed loan access (meaning you can’t be turned down if you have the available collateral capacity), no taxes on growth in the contract or the death benefits, and a life insurance policy can provide additional benefits with the addition of riders – such as disability waivers on contributions.
All in all, permanent life insurance performs very well as a private reserve.
Your Client’s Choice: Structured vs. Non-Structured Loans
When one has an established private capital reserve, they are in a position to choose between using it and other financing options – since they should have their private reserve to fall back on in case of a difficulty with their alternate funding source.
While the insurance company offers you loan access with non-structured payments, it can also act as a safety position to secure structured loans with other institutions that may offer more favorable interest rates providing you even more liquidity, use and control.