Another Way to Implement Privatized Banking Loans

Our Privatized Banking systems have a built-in method for dynamically accessing Cash Value:  Policy Loans.  This method has many features we love, including:

• No repayment term
• Competitive interest rates and compounding (near simple interest)
• No approvals required
• Available soon after policy start

There has also existed another method, under various names similar to Cash Value or Insurance Backed Line of Credit.  We will call it IBLOC for short. This is a commercial (Federal Reserve) bank loan that recognizes your Cash Value as collateral.  Exactly like the insurance company does. Like a home equity line of credit (HELOC), the cash value in your policy—like your home—is promised in return in case of non-payment.

What are the differences in this method and why would you do it (or not do it)?  The process across several banks is similar.  You sign a contract for a known (currently $60,000 or more), minimum Cash Value to be used as collateral.  This assignment is made known to the insurance company, which will then restrict your policy loans to the amount in excess of this. For example, if you have $200,000 of cash value and your take out an IBLOC for $100,000, then your loanable amount from the insurance company is ~95% of the remainder or $95,000.  All that makes good financial sense.  When the IBLOC load is approved, the bank issues you a credit card and/or checks.  You can then access loans up to the limit of the IBLOC contract.

Here is where the differences start showing up: Minimum interest payments—monthly or quarterly—and a defined repayment term for the loan principal (like three or four years). How the latter term is measured also varies.  As with any other loan from an institution outside your insurance company, non-payment can result in loss of your Cash Value.  This is done by forced withdrawal.

Not to put an overly negative face on this, we must answer the question of “why would you do it?”  The reason is the interest rate. These banks have been known to offer rates of 1-2% below the insurance company.  That is subject to change, but it is not entirely unimaginable given that the loan principal is fully collateralized, and you are paying the interest regularly.  If you gave out a loan as a Privatized Banker, you would probably like those terms as well. As we are financial realists, the difference is a trade-off of terms for a reduced interest rate.  In fancy financial language (“arbitrage”), having money at a lower interest rate  (“cost of money”) improves the return of a business deal.

Interest rate arbitrage is not for the faint of heart, but it can make a difference in your decisions.  Having a one or two-percent difference in rates may change a bad deal into a good one. As Warren Buffet says, “you can’t go broke making a profit.”  If you are using loans to support investments with an expected cash flow and ultimately a profit, this could be the technique for you.  If you are doing only self-finance for lifestyle items, probably not.

Here is a quick comparison of the positives and negatives of this approach. If you have more, I’d love to hear them.

Positives

• Lower Interest rate
• Credit Card with a high charging limit
• Check access
• Ease of recording interest paid for business loans.  This may appeal to your CPA.

Negatives

• Minimum policy age may be required (>1 year)
• Minimum line of credit amount  (Cash Value) could be far more than what you have
• Approval required  (and re-approval for higher limits)
• Regular interest payments are mandatory
• Some states have origination fees (consider it more fixed interest in your calculation)
• Only certain Insurance companies may be accepted by the bank
• Limited repayment term of the principal (e.g., 3-4 years) or the account’s life itself
• Minimum loan amounts may be required per transaction
• You are paying interest to a company you do not own.  These banks are part of the Federal Reserve/FDIC system.
• Your Cash Value is at risk for non-payment of interest or principal

The list above wasn’t compiled to overwhelmingly convince you not to consider this.  It is important to know all the differences and realistically evaluate the option rationally.

If you have an uncomfortable feeling about any of these negative, then this is probably not for you.  Nelson Nash emphasized having peace of mind as a true value in financial matters, and I couldn’t agree more.  If you are actively pursuing Privatized Banking and taking it to the limit with sound business assessments, then you may really like this.

This illustrates yet again the truly many ways (infinite?) you can use Privatized Banking.