Pay Simple % Earn Compound
People researching the Infinite Banking Concept (IBC) with Whole Life insurance often believe there is some magic mechanics to taking a policy loan. In reality, the science of compounding, leverage, and arbitrage is what can maximize your Infinite Banking Strategy.
In fact, even borrowing against your policy to pay premiums can be advantageous if the right math structured into your strategy. The use of cash value lines of credit programs (CVLOCs) can help lower your rate substantially and increase the IRR of your cash flow.
This video explores the math behind some scenarios where full leverage is applied to test the efficiency of the arbitrage under different hypothetical loan interest and growth rate scenarios.
Hi, this is Hutch with Bankingtruths.com. And do you ever wonder if borrowings really a good idea, especially involving a life insurance policy? Well, today’s video is going to be all about paying simple interest so you can earn compound interest and it’s actually going to be a masterclass in leverage and an arbitrage, but I get it.
We all have this natural block to borrow. Totally normal. It’s a defense mechanism to protect us because use your responsibly leverage can get you into a lot of trouble, but in today’s launch straight environment, savers are being punished and borrowers are being rewarded and life insurance is one of the safest and most responsible ways to utilize.
Don’t take my word for it. Look at the major lending institutions themselves. If you want bargain stocks, they’ll give you about 50% loan to value. And that’s because of the risk profile involved. You want to do something like investment-grade bonds or investment real estate. You might get 60 to 70%, but you borrow against a properly structured life insurance policy.
Now you’re talking 90 to 95% loan to value. And that’s simply because they understand what a safe and stable asset class it is. The whole banking concept. The engine behind it is all about the rate arbitrage. I don’t care what books you’ve read. It’s not about a magic policy or a magic policy loan.
Please step away from the snake oil. It’s about the science of compounding and leverage. And what you’re going to see in today’s video is that the math behind the arbitrage is it linear, but it can be quite beneficial, especially employed safely through a life insurance policy. So let’s. All right. I’m very proud to show off my new leverage calculator to help us with these mathematical examples.
And we’re going to put $10,000 into a life insurance policy just for round numbers. For an example, we’re going to say that you can simultaneously borrow against the full 10. Even though you can’t do that in real life. I just want you to understand the concept of leverage. So we’re going to duplicate the inputs.
Then we’re going to pay ongoing premiums of 10,000 for the next nine years. And we’re going to do loans at the exact same time. So that could mean that you’re paying the premium and then borrowing against it right away to use it for other things. Or it could mean you’re borrowing the money to pay the premium right away for this example.
And if we just say the low rate is the exact same as the growth. And we’d just look at 10 year for an example. And what you can see is there’s really no mathematical benefit. At the end of 10 years, you have 32,000 of growth and you have interests that compounded against you since you didn’t pay any, we’re going to do that later of the same amount, but there still could be an example of, uh, well, at least if you were to pass away, Uh, your family would get paid the death benefit, or if you became too sick or hurt to work.
And there were those chronic illness benefits. And the other reason why this is still valuable is most people aren’t fully leveraged all the time. And at least they have a policy to compound for them when they’re not borrowing. So even if you had to do this for a little while, it’s not the end of the world, but there’s a better way.
So with whole life right now, we can get loan interest down to three and a half percent using these cash value line of credit programs or CV lock, almost like a heat lock or turnkey for life insurance. And what we see is the growth didn’t change the still the same 32,000, but the loan interest only compounded against you at 21,000 because the interest rate is low.
And so our equity, the 32,000 less than 21 is $10,648. And I know some of you were thinking, well, what’s the big deal. It’s basically one and a half percent, five minus the three and a half on 10,000 a year for 10 years. It’s not, that’s what this button does is we calculate what one and a half percent would be.
On that 10,000 a year for 10 years. And it’s only 8,600. So why this $2,000 difference it has to do with that compounding because it’s not compounding at one and a half. It’s compounding at 5%. And that turns out to be a staggering number, especially when we extend this study period. For 25 years, you’re looking at basically double the growth, not quite, but almost double the growth.
71,000 from a 5% compounding, even with three and a half percent compounding against you. Versus the same hundred thousand bucks at one and a half percent. Whoo. Now the fact of the matter is most of you are going to pay interest most of the time, which we’re going to look at in a moment and you actually have to pay interest monthly.
If you want to use these cash by Yolanda credit programs. But if you need to bail out of it, if you just can’t have cashflow or you need every penny for a flip, or you have an emergency, you can always refinance the cash value line of credit to the policy loan. And it can basically be a wash like situation.
Now you’re not going to do that for 25 straight years, but you do have that ability to do it. If you need it, let’s go back to paying interest annually, and let’s go back to 10 years from. So I remember the 10-year scenario with the 32,000 and growth. If you were to pay interest annually, even if it’s at the 5%, look at this, there’s still a benefit there.
And it’s because you would’ve paid only total interest of 27,500. Uh, if we go down here, we’ll actually look at that because every year you’re paying the 5% interest, 500, then 1,015 hundred. So you paid 27 50. And if you do that well, let’s see what happens while your equity is the full 32,000 growth because you flattened the loan and your, I R R your internal rate of return out of all your out-of-pocket cash flow, which is just the interest paid is actually 3.81.
So that’s interest interesting. That’s funny. Uh, you have 5%. And you paid 5% loan interest yet the IRR on your cashflow let’s look at the table. And all the IRR means is if we, you paid this money into an investment 500 than thousand and 1500 than 2020 500. So. Over time and it equals 32,000 in equity that you can use, which is exactly the situation here.
It’s essentially like getting a steady 3.81%. And so, again, it’s what I said. It’s not linear. And so what you can see is there’s an advantage to paying simple interest so you can earn that compound interest. Well, what if we can get some arbitrage? Let’s take a look, uh, at the three and a half. At the three and a half.
Well, now we only paid 19 to 50 and look at what happened to our internal rate of return. Wow. The same 32,000 a growth. But since we paid less interest, why? Because we’re not paying 500 and a thousand and so forth because it’s 5%, it’s three and a half percent. So because our out of pocket cash flows are less to equal the same growth number.
The IRR is now 12.39%. Well, that’s interesting. What if we got this all the way down to three, which you can get for bigger policies, if you have bigger whole life policies and have a certain amount of cash value. Uh, you can get loans down to as low as three, versus if you have a smaller palsy, we have companies that can give it to you at three and a half currently can’t guarantee when you’re watching this.
Uh, but look at what happens to our I R R. It’s even better. Why? Because we’re paying less out of pocket to get the same growth rate. So what’s interesting is if we extend this to be 20 years weigh for it, look at our internal rate of return. Now it actually goes down. So it doesn’t mean, I mean, certainly that’s not a bad use of money, but that has to do with the science of compounding and, uh, essentially.
Compounding is better over time. And because it’s better over time, essentially, you’re getting a lower rate, right? You have to continue to pay interest at 3% on the hundred thousand dollar loan, the loan to borrow those 10 years of premiums. So your out-of-pocket extends and by doing so you do end up with a nice bit of.
For your payments, but the IRR shrinks a little bit again, still quite good. And what if we even kick it up to three and a half? Still a pretty good IRR. What if the growth rate goes down? Right? What if we’re down here? What’s our wait for it still pretty good. What if we only get half a percent of arbitrage?
You only get 4% growth and you’re paying interest on three and a half percent. Well, now we’re still looking pretty good. As far as an arbitrage proposition. Well, hopefully my generic example helped open your mind and broaden your horizons about using safe, responsible, and intelligent leverage with life insurance.
Obviously what we do when we’re working with clients is we take these same concepts and apply them to illustrations. We stress test them with lower dividend rates. We put in different loan rates. We overlay the loans under the policies and help match it with your projected cash flows. As they grow over time, we’re finding more and more.
People don’t want to start multiple policies because they don’t want to miss out on this growth in the future that they kind of want the right science policy right now. But if they get too big of a policy, it’ll lead into their cash value, if they don’t under it. And if they get too small of a policy, they won’t be able to put in more later.
And we’re finding that they’re open to the idea of using this leverage concept to get that Goldilocks size pause. Now, especially since regulations changing and they can get into it now and get that compounding started early for them. I encourage you to book a slot on our calendar so we can help model these things for you and help you find that Goldilocks size policy.
Talk to you soon.