How I am Getting out of Debt and Financing My Life
This is the 3rd article in a series of 3 that shares the financial journey my wife and I went, and are going, through.
The 1st article is: How My Financial Beliefs Have Changed
The 2nd article is: How I am Capitalizing My Banking System
Again, I am not recommending anyone make the same decisions we made with our money. I am simply sharing what we did and why. As always, you should seek the appropriate financial professionals before making any decisions with your money.
The “Fixer-Upper” Financial Mentality
“We find the worst house in the best neighborhood and turn it into our client’s dream home.” — Joanna Gaines (Fixer-Upper TV Series)
Why paying Premiums should be prioritized over repaying Policy Loans
Chip and Joanna Gaines intentionally find undervalued properties in great locations so that, when they work their magic on the property, they know the value will be much greater than what they put into it. In fact, when they are finished, the property tends to increase the value of the whole neighborhood.
If Chip and Jo happen to purchase one of these undervalued properties for themselves, for whatever reason, do you think they would prioritize paying off the mortgage first? Or would they focus on improving the value of the property before doing anything else?
My vote is the latter.
Our society conditions us to prioritize paying off the mortgage as the primary strategy to build equity in a property. Though paying down the debt does increase the equity today, increasing the overall value of the property increases the equity today and forever, assuming the outstanding mortgage balance stays the same.
The same is true with paying into an existing whole life insurance contract, structured for the Infinite Banking Concept, that has an outstanding policy loan. It is true that when a repayment is made to a policy loan, the principle balance and the future interest owed is reduced, increasing the current equity (cash value) of the policy. It is also true that paying a premium increases the equity (cash value) of our policy. The difference is that premium purchases additional death benefit, increasing the total value of the contract, which not only increases the current equity (cash value), but ALL future dividends. The increasing dividends steepen the exponential compounding effect of the policy every year the policy stays in effect.
In real estate, market values are determined by supply and demand. Chip and Jo are limited on how much they can increase the value of the property. If they were to buy the nicest house in a neighborhood to upgrade, they may not be able to increase the equity very much and very possibly loose money in the deal.
This is not the case with dividend-paying whole life insurance. The value of the asset is determined simply by how much premium someone can pay. Higher premiums produce higher death benefits, higher dividends, and higher cash values (equity) as long as the contract is in force.
It is like owning a house that you could continue increasing the value of without market limitation or market fluctuation, with unlimited access to the ever increasing equity for any other needs in life.
That being said, the Income Taxes we owed from our retirement withdrawals, were financed through our policy. Once we knew the amount owed, we requested a policy loan through the online portal of the life insurance company for the approximate amount. Within a few days, it was directly deposited in our bank account for us to pay the tax bill.
We did not setup an automatic repayment plan for these loans. Everything we are saving is going into our savings account to pay our annual premiums. As income increases, expenses decrease, or we receive windfalls, we will pay down policy loans, but only after premiums are covered.
Paying Off Debt
About this time, we also started utilizing policy loans to get out of debt. Fortunately, we only had our mortgage. We did not have enough cash value to payoff the full amount yet, but we were able start paying down the note systematically.
At the time we only owed about $100,000 at 3.5% interest rate (because of the equity from our prior home and some savings, we were able to put a 50% down payment on our current home). Our monthly mortgage payment was about $500. The interest we were paying was over 60% of our payment. Our Escrow payment was also about $500 per month.
We did not want our monthly payment going to the mortgage company anymore, but to our own policy, as well as, pay off the mortgage earlier. Therefore, we took a policy loan for $6,000 ($500/month) to pay the next 12 months of payments, plus another $6,000 as a principal reduction ($12,000 total policy loan).
I know what your thinking, part of the monthly payments would go to pay taxes and insurance also. What we had to do, so that our payments would go to the loan and not to taxes and insurance, was to cancel the escrow account. Interestingly, we had to ask permission from the investor of our mortgage. Once approved, we had to pay a small termination fee, then we were refunded our escrow balance. At this point, we had taken over the responsibility of paying our own property taxes and home owners insurance premiums (which we also finance through our policies; more on that later).
By simply prepaying our mortgage for the next 12 months and adding a principal reduction, our interest volume went from over 60% to below 30%. If we only do this each year until the mortgage is paid off, we will save about $40,000 in interest charges. I expect that we will speed up the process over time to further reduce interest costs.
Now that we don’t need to send our $500 per month to the mortgage company, we setup an automatic transfer into our savings account to pay future life insurance premiums.
We do the same thing for our property taxes and insurance. The amount we were sending to the mortgage company (another $500/month approximately), we transfer to our savings account to pay future life insurance premiums. When it’s time to pay taxes and insurance, we simply request a policy loan.
Also, since we value our capital more than the mortgage companies, we add a 10% interest charge to ourselves. Therefore, approximately $1,100 is automatically transferred to our savings account to first pay life insurance premium. If premiums are covered, we will then prioritize paying any interest due on the outstanding policy loan balance so that it will not compound. Lastly, if we still have some funds available, we will pay down the principal loan balance.
Once the mortgage is completely paid off, we will continue making our payment to our policy to either pay premiums, or reduce policy loans.
If we want to make a loan repayment, we simply submit it through the life insurance company’s online portal for the amount we want. Within a few days, it is taken out of our bank account to reduce the loan balance. This will increase the available cash value to access again for another need.
Again, we ALWAYS want to prioritize paying premiums over paying policy loans. Both increase the available cash value, but premiums increase the death benefit, the cash value, and the dividends every year into the future, versus only reducing the loan balance and interest owed today.
Within the next 6 months we plan to start managing our tithes and other giving to flow through our policies as well. Another opportunity to pay more premium.
“The problem is the problem. Premium is the solution.” -James C. Neathery of Banking With Life