Why Does Life Insurance Charge Interest For Loans?
If you’re reading this you’ve probably considered the Wealth DynamX Sacred Account. You’ve probably read some of my articles or maybe even watched some of my videos on the account. Everything has sounded good and looked good so far except for one thing….LOANS.
“Why would I pay interest to borrow my own money?”
“Do I have to pay interest to borrow?”
“When do I have to pay it back?”
I’m going to answer all of those questions today.
But first, a brief summary of the Sacred Account in a very simplified format.
You save money (at least $500/mo).
Before, you’ve saved in banks and retirement plans. But you’ve realized those aren’t actually a good place to keep money.
So you start a Sacred Account.
Why? When you put money in, you earn a 6–8% gross dividend, tax free, and your money still grows even when you’ve taken it out. That’s why.
But what about this loan thing? Let’s dive into this. When money grows and you want to take the money out, guess what happens? Taxes. That’s right. If you made money, this IRS will tax it. How do you avoid taxes? Depreciate losses or write off expenses that are equal to or greater than what you made in returns.
Don’t take the money out and don’t pay the taxes.
How do life insurance loans factor into this?
Well first a little back story. When you buy life insurance, you become an equity owner in the actual insurance company. This means you are treated like a shareholder.
You’re a shareholder that gets a death benefit, dividends, and a cash value. When you have money in your cash value and a death benefit, you have collateral. So this puts you in a position where you are easy to loan money to. You’re an equity owner and you have two forms of collateral. That’s a very safe loan and we can all agree on that. If you were going to lend money to someone in your company and they were an owner and they had double forms of collateral, it would be a no-brainer. That’s you.
Okay so you have money in your cash value. You’re earning dividends. If you withdraw the money, you’re going to pay taxes. Rather than paying taxes we go to the insurance company and tell them we have an amount of money in our account and that we don’t want to pay taxes…so we ask for a loan.
The life insurance company loans you the amount of money that you want and you use your cash value as collateral.
Two things happen here:
#1. You don’t have to pay taxes. Why? Because the IRS can’t tax a loan. This doesn’t just apply with life insurance. This applies with everything. When you borrow money for a car, the IRS doesn’t tax your loan. It isn’t income. So by loaning against your cash value, the IRS can’t touch you.
#2. Your money never left your account. Think about it, you didn’t actually withdraw your money. You borrowed against your account and your money stayed in there. So think about this. If your money is still in the account, it is still growing because it never left. Logic says if I can use my cash value to go make 12% in a real estate deal, and my money stayed in my account and is earning 6% gross annual dividends then I made 18%.
But what’s the catch?
There are also two of them.
#1: Your dividend gets reinvested to buy more shares and you only have about 75% liquidity to them. So if I earn a 6% gross dividend and it gets reinvested, I earned 6% but I might only see 4–5% of that in my cash value.
#2: You will pay interest to borrow. That’s why the insurance company will loan you money. They’re going to make money in the form of interest. How does the interest work? Well it is simple interest (interest only), calculated daily, and due once per year. It does not compound and it you don’t have to pay it monthly. Your rate to borrow will usually be 5–6%.
However, if you’re earning 6% and borrowing at 5%, you are actually making a profit AND avoiding taxes.
If you’re earning 6% and borrowing at 6%, you are breaking even and avoiding taxes.
Why pay interest? Because it’s better than taxes and because you own the company you’re paying interest to. If you had to buy gas would you buy it from the station you do own or the station you don’t own? You’d buy from the one you own right? Yea you’re “paying for gas” but you own the station and it benefits you as an owner. Could you get gas for free? Sure, but that would be short sighted and a terrible business move. You pay the same price as everyone else and you receive the benefit through the growth of your gas station’s revenue.
So you pay interest to a company you own, which increases their revenue, and can increase your dividends as a shareholder.
A few notes to keep in mind as well.
If you borrow, only do it for things that will EARN interest and cash flow.
Also, only borrow for things that will EARN interest and cash flow at a rate greater than what you’re paying to borrow.
For example, if I will pay 6% interest to borrow, then I should not borrow unless I am going to earn at least more than 6%.
Lastly, (and this is not tax advice. It is just what I do) if you’re going to borrow, lend it to an LLC you own first and charge yourself the same rate you’re borrowing at before you actually invest. And when you invest, invest via the LLC that is paying the interest to you. Why do I do that? Because my LLC can write off the interest that it pays me, which ultimately makes the interest I pay on my cash value loan tax deductible. Not literally, but it offsets. If I’m paying 6% personally on my cash value and an LLC that I own is paying 6% and writing it off as an expense, then it offsets the cash value interest.
I know I covered a lot and I don’t expect you to master it all off this article. But if you read this and it made sense and you’ve been considering this, I want you to reach out to me. This account is for the person who is already saving money, wants to save more, and isn’t earning a good return on the money they’re saving now. I’ll educate you, answer your questions, and most importantly I won’t ask you to move forward if you don’t think it makes sense. Click here to learn more.
Own Your Potential,
Grant Cardone Certified Coach
Jerry Fetta helps his clients gain more financial knowledge, make more money, keep more of it, and multiply what they keep.
If you feel like one or more of these areas is costing you money and opportunity right now, then get more information about Jerry Fetta and Wealth DynamX by going to www.WealthDynamX.com/contact