DEBT-FREE LIVING… & Cash Value Whole Life Insurance

I finally read through a book recently by a man who I greatly respect, and who is greatly respected by many, as a Christian stewardship expert. Larry Burkett (1939–2003) has greatly impacted millions of lives through his biblical teaching of money and stewardship. Mr. Burkett along with Howard Dayton and Ron Blue have achieved great feats to help make biblical stewardship more mainstream.

Dave Ramsey has admitted himself that a primary influence for his financial strategies came from the teachings of Larry Burkett.

This article is somewhat of a review of the book, but mainly an opportunity to expand on a particular idea mentioned by Mr. Burkett for individuals to achieve Debt-Free Living.

Quick Summary

[Debt-Free Living] will teach the consumer about the origin of most financial troubles and help him or her break the ‘debt cycle.’ Debt-Free Living is a necessary resource to battle the temptation and trappings of debt that are weighing you down.

  • Part One is made up of several stories of people who fell into debt, and the negative impact in several areas of their lives.
  • Part Two is about how they climbed out of the crisis with wise counsel, personal discipline, and accountability. Ultimately it’s up to the individuals to solve their own problems, no matter the skills of the advisor.
  • Then there is an Interlude that goes through a quick history lesson of how our country got into this debt crises. It also introduces some of what the Bible says about debt as well as some common debt traps today.
  • Part Three goes into more detailed information on some practical services and strategies that are available. To me, this was the most interesting part because there are subtle things mentioned that seem confusing, but other things that could be a book on their own.

For instance, chapter 11 is about credit; how to establish it, avoid it, and improve it. This is somewhat confusing to me because, if this book is about getting out and staying out of debt, why is it teaching people how to manage debt so they can, though more responsibly, continue in the debt cycle? Credit Scores are primarily needed if someone is planning to borrow from a typical finance company. Shouldn’t this chapter only be teaching strategies to avoid debt all together? Most readers may assume that it’s just not possible to completely avoid debt to typical finance companies, so they concede that the title of the book is just a catchy title and not a real solution to our financial problems. However, the ideal solution for anyone and everyone to permanently get out and stay out of debt to typical finance companies, multi-generationally, is mentioned (barely) in the next chapter.

Chapter 12 is about helpful resources to consolidate debt. The VERY FIRST SOURCE mentioned is:

Cash Value Insurance

An often-overlooked source of funds for consolidating [debt] is the cash value in an insurance policy. That money can normally be borrowed at far less than market rates. Even if you don’t have a cash value policy, perhaps a parent does and would be willing to lend it to you.

“often-overlooked”?

I would say this source is the MOST overlooked and misunderstood financial tool in all of our society today. More specifically, Mr. Burkett is talking about cash value life insurance.

Life Insurance Policy Loans vs. Finance Company Loans:

  • Finance companies seek profit to produce income (dividends) for the owners of the company, which is not you and I. Mutual life insurance companies seek profit to pay income (dividends) to their owners as well, who are the policyholders.
  • Typical finance companies require borrowers to provide more collateral than the loan amount. An important reason is because the property typically utilized as collateral, fluctuates in value and is not guaranteed, therefore placing all risk on the borrower. The policy loan collateral is NOT your house, vehicle, etc., but the available cash value (the equity of the life insurance policy) equal to the outstanding loan. The cash value, used as collateral to secure the loan, is guaranteed by the insurance company, putting ALL risk on them.
  • The policyholder, who requests a policy loan from the insurance company, sets the terms of the loan, not the insurance company. The loan can be paid back whenever and however the policyholder decides. If the loan is never paid back, it will be deducted from the death benefit when the insured passes away. Finance companies give the borrow a schedule when they want to be paid, and prefer payments be setup automatically.
  • With certain mutually owned (owned by policyholders), dividend paying whole life insurance companies, interest and dividends are earned on the total cash value regardless of any outstanding policy loans. For example, if there was a policy with $100,000 in cash value, but an outstanding policy loan of $50,000, interest and dividends earned would continue compounding on the full $100,000 cash value. Repaying policy loans, with interest, contributes to the profitability of the life insurance company, which the policyholder is a partial owner of, producing consistent dividends. When loan payments are made to finance companies, all the future earning potential on the borrowers repayment dollars is lost in interest paid (to their owners, not you and I), as well as, any opportunities given up, forever.
  • Payments on loans through finance companies are typically amortized monthly to prioritize the interest before principle; whereas, loan repayments made to policy loans are applied as a 100% principle payment. The interest is tabulated throughout the contract year and applied once a year on the contract anniversary. Though the interest rate on a policy loan may be similar to a loan through a finance company, the volume of interest can be significantly lower.

Interest Rate vs. Volume

Pull up a free online loan calculator and plug in your own loan information to see how much interest, by volume, will be paid out during the life of the loan.

For example:

$100,000 loan at 3.5% annual interest over a 30 year period would cost $61,657.36 in interest, not including application fees, closing costs, and other fees. That is 61.65736% interest by volume. Reducing the term to 15 years would cost $28,678.86 in interest, again, not including other fees and costs, which is 28.67886% interest by volume.

Another caveat to the typical loan amortization is that interest is paid up front. For instance in the 30 year example above, the 1st year of payments has $3,469.26 in interest being paid toward $5,388.48 in total payments for the year, which is 64.38% interest by volume, versus year 30 has only $100.89 being paid toward interest which is 1.87% interest by volume.

So what?

How many people actually pay off their loans for the most expensive things like automobiles and homes?

Most of the time, vehicles are traded in for a different vehicle, and houses are sold (or refinanced) to purchase other ones prior to the loan payoff, starting the process all over again and keeping the interest volume at the highest levels. Continuing the 30 year loan example, let’s say this loan is for a house. If this house was sold (or refinanced) after 5 years, the total loan payments would have been $26,942.40 with total interest being $16,614.90 making the volume of interest 61.67% over the 5 year period, or 12.334% by volume per year on average. Most people in our society pay much more than the advertised rate of interest.

Consolidating Debt through Cash Value Life Insurance

Here is an example of how debt could be consolidated or paid through a cash value life insurance policy:

***THIS EXAMPLE SHOULD NOT BE CONSTRUED AS FINANCIAL ADVICE. There are several ways to accomplish individual goals that should be tailored to a persons specific needs and abilities. Please consult the proper professionals as needed for your specific situation.

Many people are familiar with the ‘Debt Snowball’ strategy, where all debts are listed out from greatest balance to smallest balance, then paid off as quickly as possible starting with the smallest to the largest balance. Once the smallest balance is paid off, the payment that was going towards it can then be applied to the next smaller loan balance until all debts are eliminated.

This same concept could be integrated with a cash value life insurance contract. Rather than paying as much as possible to the smallest debt first, one could pay as much as they could in life insurance premium first. When enough cash value is accumulated, a policy loan can be taken to pay down the debt. The monthly amount that was going to the creditor can then be used to pay more life insurance premiums or pay down policy loans. Over time, all debt could be consolidated in the loan provision of the life insurance contract, as well as, any future financing needs.

More on Cash Value Life Insurance

Paying a life insurance premium will set into place an exponential wealth compounding effect as long as the policy stays in force. By accessing the cash value through policy loans, rather than withdrawals, the compounding continues uninterrupted. When policy loans are repaid, the cash value will be available to borrow from again. Here is a diagram to illustrate:

The cash value can be accessed at any time from the life insurance company for any reason. As cash values grow throughout an individuals life, there may also be an opportunity to access substantial tax-free passive income from the policy if desired.

Furthermore, if someone will solve their need for financing through high cash value dividend-paying whole life insurance, they will also end up with more death benefit than they may have otherwise purchased. The death benefit, minus any outstanding loans at passing, will be a tax free blessing to heirs that could be used to pay additional life insurance premiums, perpetuating and expanding this powerful financial strategy through multiple generations.

If only there was a book to further teach this unique and powerful life insurance strategy.

BYOB

About the same time Larry Burkett’s book was published, a book titled Becoming Your Own Banker became available to teach this very concept.

A whole life insurance policy from a well run dividend-paying mutual company (owned by policy holders), structured for high cash value, has all the perfect ingredients for an individual to establish their very own privatized “banking” system. This strategy was discovered and taught for many decades by R. Nelson Nash (prior to his passing in 2019) who coined it as the Infinite Banking Concept. The primary purpose of this powerful strategy is to recapture interest and charges that are either paid to finance companies, or given up (opportunity costs) when saving cash and spending it. These costs, in either interest paid or interest lost over a lifetime, are quite large when focusing on the volume of interest rather than the rate of interest, as we have seen.

Going to the Source of Truth

Chapter 15 of Mr. Burkett’s book lists several sources of Where to Find Help to overcome debt problems. The source identified as THE MOST IMPORTANT ONE is the Word of God.

The Bible

“God will not give us a direction in opposition to what He has already given in His Word. The fundamental step is for an individual to understand what the Word of God says. Once he or she knows the rules for managing God’s money, life becomes much easier for both the coach and the one being coached. If someone is not willing to follow the instructions given in God’s manual, the best coach in the world can’t help.”

It list several bible passages around the issue of debt. One specifically discussed was:

  • Deuteronomy 15:4 However, there need be no poor people among you, for in the land the Lord your God is giving you to possess as your inheritance, he will richly bless you, 5 if only you fully obey the Lord your God and are careful to follow all these commands I am giving you today. 6 For the Lord your God will bless you as he has promised, and you will lend to many nations but will borrow from none. You will rule over many nations but none will rule over you.

Verse 6 was emphasized in the book to point out that God’s people should “borrow from none.” However, there was NO discussion of the instruction that God’s people should “lend to many”. Now, this verse specifically states “lend to many nations”, but if the full section is read, it reveals that God is speaking to not only the nation as a whole, but to individuals also. Furthermore, in Deuteronomy 17 God gives specific limitations to the king (government) not to accumulate large quantities of gold (money). How would it be possible for the king (government) to control the lending function of the nation if he does not control the capital? He couldn’t. Capital control was to be in the hands of individual citizens. In fact, there are many passages throughout the bible that instruct God’s people to be ‘lenders’ and not ‘borrowers’. Therefore, the best way to not be a borrower, is to be a lender. God also gave specific parameters on why and how to be a lender that, for brevity sake, will not be discussed in this article, except to point out that God wants the lenders and the rulers of the world to be His people who are humbly and faithfully obedient to Him (read verse 6 again).

God reveals that the most beneficial financial system is one where it is owned and controlled by individual people in mutually beneficial agreement with one another. Servants of God can own and control their very own individual, privatized “banking” system, again.

“Banking is the most important and most profitable business in the world — It should be controlled by you and me.” — R. Nelson Nash

If only the late and great Larry Burkett knew the potential of high cash value dividend paying whole life insurance beyond only consolidating debt.

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Austin L Garner

Austin L Garner

Founder of Disciple Wealth Strategies. Serve God & Master Money (Luke 16:13)