Answers to Your Money Questions, Part 2

We all have money questions.  If you don’t, you just haven’t asked them yet. https://www.youtube.com/watch?v=jrsQ4Tzo7ao Today, we continue to answer questions from you—our audience, tribe, fans, those in a quest to control their money and financial future! You can view part one of this conversation here. There are some great ones here that might be on your mind too. So maybe you’ll get the answer you’ve been needing, so you can clear the hurdle and get one step closer to your goals… OR maybe it will prompt you to ask a question of your own… tune in now! Table of contentsWhat Should You Do With Extra Cash?How Can Debt Be Advantageous?Compounding InterestIBC Isn’t About Paying Off DebtCan You Withdraw Your Cash Value?Available Cash ValueLow Cash ValueWhat Happens if You Withdraw All Your Cash Value?What Happens if You Collateralize All Your Cash Value?Policy CollapseIs There a Difference in Dividends on Base Premium vs. PUA?Do You Get Your Cash Value When You Die?What Endowment MeansCan You Pay Premiums on a Monthly Basis?Book A Strategy Call What Should You Do With Extra Cash? In this instance, a listener named Matthew says he recently did a cash-out refinance. Now, he’s wondering what to do with the cash he has leftover.  Really, the answer depends: there’s no one-size-fits-all answer to this question (or in fact, many questions). The follow-up question that we would like to pose in return, is what is the purpose of your money? What do you want to accomplish with your money? You can approach this from the big picture as well as on a smaller scale, like what you want your money to do at this stage of your life.  If you’re unsure of what to do with extra cash and want to hone in on your money’s purpose, here are some clarifying questions: Does your money need to be accessible to you? Or is this money you are comfortable locking into an investment or other illiquid arrangement?Are you looking to create a cash-flowing asset that will create passive income?Do you wish to use this money for long-term growth? Or do you have a short-term opportunity?Is your emergency fund sufficient? Are you looking to take on some risk, or protect what you have? It’s also okay to wait and be patient until you know what you want to do—or an opportunity presents itself. A privatized banking system may be a good way to store cash long term while you wait. Or you may want to park your cash short-term. You may want to do a combination of many things. How Can Debt Be Advantageous? Another listener mentions their interest in IBC, yet is unsure what the advantage is of funding a whole life insurance policy just to take a policy loan? They offer an example of funding a policy with $40,000 of cash value and accessing $36,000 to make a purchase, such as a car. By their calculation, they’ve funneled $76,000 into a $36,000 car.  This is an extremely important question and one that “makes or breaks” people’s understanding of IBC. Because this can be hard to wrap your head around, and it may take some “unlearning” of what you’ve been told about life insurance. First and foremost, you can’t think of your life insurance premium as a “cost” to you. Instead, consider it savings that you can automate. Because the premium payments you make directly fund your cash value, which grows over time. It’s no different from paying money to the bank; or more directly, paying into your home and taking a home equity line of credit.  If you contribute $40,000 to your savings account, and then spend the savings, you’re not paying twice. You’re storing your money and then using it. A life insurance policy is another means of storing money, and a policy loan is another means of using that money.  The advantage of taking a policy loan, rather than a withdrawal from a savings account, is twofold. First, you have control. You can determine how fast, or slow, you pay the loan back. If you run into a lean year, you can make lower car payments if you want to (unlike a bank). You also own the car outright, rather than having a bank loan secured by the car.  Compounding Interest Secondly, you have the power of compound interest. Say you paid for your car in cash that you withdrew from your savings account. While you’re not paying interest, you’re also not earning it. On the other hand, when you borrow money against your cash-value account, your money stays where it is. As such, it continues to earn interest, which has a compounding effect. The interest you earn also earns interest, and it picks up speed. So while you may be paying interest on a loan, you are also earning compounding interest. Does this mean it always makes sense to take a policy loan? No. However, the cash value of your policy gives you many opportunities. To learn more about policy loans: Privatized Banking – Life Insurance Loans and Why We Use Them IBC Isn’t About Paying Off Debt The primary reason for IBC is not to pay off debt. If you’re looking to be debt-free, or pay off debt as quickly as possible, IBC may not work for you. And that’s okay. IBC is really about learning to leverage money and make it work in multiple ways at once. This will often mean carrying and managing debt, depending on how you use your policy, and for some people this is uncomfortable.  To learn the best way to pay off debt: Cash Flow Index: The Smartest Way to Pay off Debt Can You Withdraw Your Cash Value? We don’t talk about this often enough, but yes, you can take your cash value back. However, a few things happen when you do this.  First, the death benefit of your life insurance is reduced. This is because your cash value is a component of your death benefit. If you reduce one, you reduce the other. You also lose the ability to put that cash value back into your policy. Once you’ve removed it, you cannot put it back. You can only pay your future premiums. Thirdly, you lose the power of compounding interest. Your cash value will continue to compound, however anything you remove will not earn interest (unlike taking a policy loan, which keeps your cash value intact). Available Cash Value If you’ve taken a loan against your policy, it’s important to note that your cash value is the collateral. When the insurance company sends you your statement, they may indicate your “available cash value.” If you have an outstanding loan, your cash value may appear much lower because you cannot have a loan larger than your cash value. As you pay down this loan, your cash value will become re-available to you.  Low Cash Value If your life insurance policy is fairly new, you may look at your cash value and think it’s low. This is because of how life insurance contracts operate. At the beginning of a policy, the insurance company bears the risk because you haven’t paid many premiums—if you were to pass away, the company would owe the full death benefit, regardless of how much you have paid. As such, they keep more of the premium upfront, and less of it contributes to the cash value.  As time passes, the risk to the company decreases, and more of the premium contributes to your cash value. It’s common for your policy to “break-even” between the seventh and tenth year. In other words, this is when your cash value is equal to or greater than the premiums you’ve paid. It only goes up from there. And unless you withdraw, your cash value will never decrease. So if you’ve begun a policy, and your cash value seems low, give it some time. Soon you’ll have a larger cash value to access.  To learn more about balancing early cash value and long term growth: Privatized Banking: High Cash Value and Long-Term Growth What Happens if You Withdraw All Your Cash Value? Many life insurance companies will not allow you to withdraw all of your cash value, though it depends on the company. When you do withdraw up to this point, however, your policy can turn into what is called an extended-term policy.  What Happens if You Collateralize All Your Cash Value? To cover all our bases, we also want to address what would happen if you’ve maxed out your loan provision. There’s an important distinction between withdrawing your cash and borrowing against it.  And if you’ve taken loans out such that you cannot borrow anymore, don’t worry. Your cash value will continue to grow and earn interest. But beyond that, as you pay off your policy loans, what you pay off becomes available to you again immediately.  If you want more available cash value, you can either be patient and watch your policy grow, or you can pay down your loans.  Policy Collapse Having maximized loans can be dangerous in some scenarios. It’s possible, for example, that your loans accrue interest faster than it earns interest. If money stops flowing into your life insurance policy through premiums and loan payments, your policy can collapse.  This is a rare circumstance, however, it can happen.  Is There a Difference in Dividends on Base Premium vs. PUA? This is actually dependent on the product, rather than individual life insurance companies. However, the difference cannot be proven exactly, because the formulas each company uses to calculate dividends are proprietary information. If you extrapolate the numbers on your own, though, you’ll see that in some instances the dividends paid on the base premium was a higher percentage than that paid on the PUAs.  Other companies and products will pay the same percentage, however, they pay more Gross dividends on the base premium. This is because the death benefit factors into the equation, and there’s a higher proportion of death benefit on your base premium. Your PUAs will only buy you a very small fraction of death benefit, like dollars or pennies on the dollar.  Another factor that will affect how dividends are distributed is the construction of the policy. You can play with the ratio of your base premium to PUA,