Borrow Against Your Life Insurance Policy: Yes or No? – Episode 158

The “Controversial Opinion Alert” sign is up and flashing for Reese and Ryan’s discussion on this episode of Dentist Money™. Everyone knows there’s a place for life insurance in estate planning – but is there really a “secret sauce” that makes life insurance a more powerful choice to borrow against than other equity building assets? Clever marketing messages from the life insurance industry say there are. Tune in to hear what Reese and Ryan have to say.

Find out which one of your assets is the best to borrow against.

Podcast Transcript:

Reese Harper: Hey Dentist Money listeners. It’s Reese Harper here and today we have a very special episode about how the 21st century of technology and the internet is changing the landscape of life insurance. We talk about how borrowing against life insurance is not such a secret sauce anymore, and some very viable alternatives that are existing more today than they have in the past that make borrowing against an asset like life insurance an antiquated strategy.

Reese Harper: We talk about Bob Dylan’s opinion on this topic, and Sir Ryan Isaac’s opinion on viable alternatives. We talk about how the competitive nature of life insurance is not quite as fluent or as friction-free as other market forces like investment accounts, real estate, and other types of investments. We talk about how to find other natural market forces to give yourself an edge, and we talk about how to look at your life insurance policy in a way that isn’t uninformed, outdated or antiquated.

Reese Harper: If you want to learn more about the cutting edge nature of how life insurance is changing in the 21st century, this episode is for you. So thanks again so much for your support, and always tuning in and enjoy the show.

Speaker: Consultant advisor. Conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisors, a registered investment advisor.

Speaker: This is Dentist Money. Now, here’s your host, Reese Harper.

Reese Harper: Welcome to the Dentist Money Show, where we help dentists make smart financial decisions. I’m your host, Reese Harper, here with my trusty old co-host, Sir Ryan Isaac.

Ryan Isaac: Do I get my own chime? Here with my trusty old co-host…

Reese Harper: You’d be the E key.

Ryan Isaac: Sir Ryan, the E? [crosstalk]

Reese Harper: For everywhere.

Ryan Isaac: I am everywhere. That’s [crosstalk]

Reese Harper: Ever existent.

Ryan Isaac: Okay.

Reese Harper: Everlasting.

Ryan Isaac: Thanks for welcoming me on the show.

Reese Harper: It’s a Christmas theme.

Ryan Isaac: Appreciate it.

Reese Harper: I’d like to also welcome Jenny back to the show.

Jenny: Hey there.

Reese Harper: Jenny has been producing this podcast for a while now, and we’d like to make sure that the audience knows that we don’t have a nickname yet that I have found for her.

Ryan Isaac: It’s patent pending, but it’s nickname pending.

Reese Harper: It’s pending. And her nickname might be pending.

Ryan Isaac: It might literally [crosstalk]

Jenny: Maybe we should source it to the Facebook group and just let them nickname me.

Ryan Isaac: Okay, DentistAdvisors.com/group, nickname Jenny.

Reese Harper: Yes.

Jenny: Nickname the producer, I’ll post some pictures.

Reese Harper: I did want to welcome also back to the studio C for chi.

Ryan Isaac: Oh yeah, the chime’s back.

Reese Harper: Hello, old friend. A lot of people, if you haven’t been here for a while, occasionally the chime needs to be brought out to calm me down.

Ryan Isaac: It does. It clears the-

Reese Harper: If I get a little bit-

Ryan Isaac: …air.

Reese Harper: …out of control, maybe-

Ryan Isaac: Shouldn’t I hold it?

Reese Harper: … the blood pressure starts rising, then Sir Ryan Isaac will point or grab the mallet and strike the C key, which is for chi.

Jenny: Let’s not forget the mallet is a Sharpie.

Ryan Isaac: The mallet is a Sharpie right now.

Reese Harper: For today that’s the shape. Yes

Ryan Isaac: For today’s purposes, fine. Technically speaking, Jenny, you’re right.

Jenny: I feel like I should be in control of this.

Reese Harper: We just got actually’d so hard.

Ryan Isaac: Yeah, I.

Reese Harper: Actually guys…

Jenny: Actually…

Reese Harper: So I can’t find the mallet, and that’s kind of why the xylophone went away for a while.

Ryan Isaac: Well I trust your self-regulation C for chi abilities if you can hold it.

Reese Harper: Today, the reason we started out with this C for chi today to get the zone [crosstalk] in the room more balanced is, this is a day where we are covering a controversial topic that sometimes raises the hair on the back of your beard.

Ryan Isaac: And haunches. Does your beard have haunches? Or do you have a beard on your haunches? I don’t know where your haunches are?

Reese Harper: That’s not…

Jenny: I think they’re on your back.

Ryan Isaac: Oh really? [crosstalk] So some people have beards on their haunches, that’s true.

Jenny: Perhaps, yes.

Reese Harper: It has nothing to do with the episode.

Ryan Isaac: No, no. Today’s episode, controversial opinion alert. It’s about life insurance.

Reese Harper: Yeah.

Ryan Isaac: It’s based on an article that was published recently on our website, if you go to aentistadvisors.com and click on Education Library, you can sort and filter for media types, podcasts, articles-

Reese Harper: Yes.

Ryan Isaac: … sort it for articles in insurance by topic and you’ll find it there.

Reese Harper: Okay, you might not think these articles take a long time, but if you’ve tried to write an article you know they take a while. They’re a lot longer, they’re a lot harder to produce than a podcast. You have to spend a lot more time, you have to get a lot more opinions and editors and people looking at it if you want to publish a good piece of content.
Now this piece of content that we published continues to get several, it’s been several, about seven weeks and yesterday I’m still getting comments on it through the Dell Success Network forum, through our Facebook group, and through our website, and I’m finding that it’s striking a chord with a few people

Ryan Isaac: Yeah, so if you want to start a fight on Facebook and you’re bored of the old Facebook fights like politics or whatever, just go repost Reese’s article on insurance and let the fighting begin.

Reese Harper: Post it in insurance brokers or financial planning websites, kind of like career kind of forum, right?

Ryan Isaac: Yeah.

Reese Harper: “But I heard this…”

Ryan Isaac: “But what about this article?”

Reese Harper: Yes.

Ryan Isaac: You were just saying something about writing reminded me of a quote from one of my favorite writers, financial writers. He said, “Writing is the process by which you learn you don’t know what you’re talking about.”

Reese Harper: Yeah. I’ve definitely learned that too many times.

Ryan Isaac: I feel like speaking is like that sometimes. Okay so today before we get into life insurance, we’re going to talk about something a little meatier.

Reese Harper: Yeah, okay.

Ryan Isaac: See what I did there?

Jenny: I like that.

Ryan Isaac: You’ll see what I did later. And I’m hungry right now, this is kind of hard to talk about. We are going to talk about the history of the Big Mac, which is your favorite sandwich.

Reese Harper: No.

Ryan Isaac: You consume two a day.

Reese Harper: It’s not. I hate-

Ryan Isaac: When was the last time you had a Big Mac? Has it been a while?

Reese Harper: It’s had to have been at least five years.

Ryan Isaac: Full disclosure because we’re about transparency, I do not like McDonald’s, except I really like a Big Mac.

Reese Harper: Really?

Jenny: Really?

Ryan Isaac: Yeah, I don’t know why.

Jenny: Their fries is what does it for me.

Ryan Isaac: Their fries are okay-

Jenny: Oh, the fries are phenomenal.

Ryan Isaac: … but I just do not like McDonald’s.

Jenny: That’s all I like there.

Ryan Isaac: But I will definitely…

Reese Harper: I don’t hate McDonald’s.

Ryan Isaac: I do. I do not like McDonald’s.

Reese Harper: You can’t say “I don’t like McDonald’s but I love the Big Mac.” That’s like saying, “You know what? I hate the movies, but I love ‘Godfather’ and ‘Jurassic Park.’ They’re the best.”

Ryan Isaac: That could be true.

Reese Harper: It’s not true.

Ryan Isaac: It feels like a paradox. Anyway.

Reese Harper: You at least respect Mickey D’s. What would your life be without a Big Mac?

Ryan Isaac: Probably healthier.

Reese Harper: You still go. You love it.

Ryan Isaac: That’s actually not true. Anyway, look, we’re going to take this back to 1967. Our good friend Jim Delligatti, okay?

Reese Harper: Okay.

Ryan Isaac: Jim’s running a Pittsburgh McDonald’s location, he’s eight years into his store and he’s kind of just getting a little… things just aren’t moving anywhere. There’s nothing fancy going on. Jim’s a little bored with the everyday burger routine. He served cheeseburgers, okay? His normal clientele were factory workers in Pittsburgh. What he noticed is they were really hungry, these were hungry people in 1967 Pittsburgh, so he invented a double-decker sandwich. He got your two patties, he stabilized the middle of the two patties with an extra bun, you know stabilization of patties.

Reese Harper: Yeah.

Ryan Isaac: Right? But he also added something in there that was very different, and this is what made the whole thing. Do you know what he added?

Reese Harper: Secret sauce?

Ryan Isaac: The secret freaking sauce.

Reese Harper: Yeah.

Ryan Isaac: Secret sauce.

Reese Harper: I know that.

Ryan Isaac: So he did this and it just went crazy. Ray Kroc-

Reese Harper: I was going to say, I don’t know this story-

Ryan Isaac: Oh, okay.

Reese Harper: I try not to learn your stories before you bring them.

Ryan Isaac: You shouldn’t. Half of them aren’t true. Just kidding.

Reese Harper: But I would imagine given what I know about Ray Kroc that he lost his mind when this guy started going rogue.

Ryan Isaac: And to Ray Kroc.

Reese Harper: Initially.

Ryan Isaac: Actually the title of this article is called “How the Rogue McDonald’s Employee Revolutionized McDonald’s.”

Reese Harper: Okay, cool.

Ryan Isaac: It’s about a rogue employee.

Reese Harper: I don’t know a lot about this.

Ryan Isaac: He went outside the system, man.

Reese Harper: Ray Kroc was-

Ryan Isaac: System.

Reese Harper: …obsessed with, he was OCD, do not violate my process.

Ryan Isaac: Yeah.

Reese Harper: And there was many restaurants in the early days of McDonald’s, like some of the more remote locations were serving hot wings… it was like chicken nuggets were … it was like chicken would take over the menu and the burger would become the small portion. It was going wild.

Ryan Isaac: Off brand.

Reese Harper: I would imagine during this time this guy probably … Ray would not have been stoked about it but I imagine he came around.

Ryan Isaac: I don’t know the in-between time, but a year later the old Kroc gave his blessing and it rolled out company wide.

Reese Harper: Interesting.

Ryan Isaac: In 1968. Two years after that, it was generating 20% of total revenue. The Big Mac alone was generating 20% of McDonald’s revenue.

Reese Harper: That’s interesting.

Ryan Isaac: Yeah, and now today, I don’t know what kind of a fact this is, interesting or gross. Americans eat 17 Big Macs every second of the day. That’s how many are sold.

Reese Harper: That’s not bad.

Ryan Isaac: It seems bad.

Reese Harper: That seems like a reasonable amount for a whole-

Ryan Isaac: It doesn’t seem reasonable.

Reese Harper: Okay.

Ryan Isaac: I don’t find reason in that. Nice little tidbit of the story though. Old Jim Delligatti ate a Big Mac every day of his life until he died at age 98.

Reese Harper: Seriously?

Ryan Isaac: Yeah, I’m going to take back the health thing. I don’t know. It didn’t affect Jim.

Reese Harper: What year was he dead?

Ryan Isaac: I don’t know.

Reese Harper: It sounds to me that was at the point where the beef was actually beef.

Ryan Isaac: Still beef?

Jenny: [crosstalk] Beef?

Reese Harper: I’m just saying that patty’s changed a little bit Ray, over time.

Ryan Isaac: Ray, that you’re listening-

Reese Harper: If you’ve watched “The Founder” or read any of his biography and seen some pictures, I’m telling you, that burger used to look a lot different in 1968 than it does today.

Ryan Isaac: They weren’t eating 17 a second across the country so, there were production limitations.

Reese Harper: Not enough cows I guess.

Ryan Isaac: There wasn’t. Okay the takeaway from the story though, I thought was really interesting, was it was the secret sauce that people went crazy about. Now fast forward in 2018 and the secret sauce people… there’s McDonald’s chefs that have published the secret sauce on YouTube. It’s not so secret and it’s basically Thousand Island dressing.

Jenny: I’m reading the recipe right now.

Ryan Isaac: You are?

Jenny: It’s actually Miracle Whip and mayonnaise. That’s the secret. [crosstalk] You use two different types and then French salad dressing.

Ryan Isaac: So there you go. You wrote this article about the secret sauce of life insurance and the kind of funny thing about the secret sauce similar to the Big Mac is that it’s not that much of a secret, and it wasn’t actually that unique as it turns out. Because it was just some salad dressing, that old what’s his name, Jim, had laying around the store.

Reese Harper: I like your story. This is a good analogy.

Ryan Isaac: Yeah.

Reese Harper: You nailed it on this one.

Ryan Isaac: All right. So here’s the lead in. When you say, the secret sauce of life insurance, what am I referring to? What is this unique, secret thing-

Reese Harper: Well I’m going to play the secret sauce advocate for a minute.

Ryan Isaac: Okay.

Reese Harper: The secret sauce is tax. It’s tax free.

Ryan Isaac: Okay.

Reese Harper: It’s combining tax free with safe, with guarantees.

Ryan Isaac: Okay.

Reese Harper: With protection from all laws and bankruptcy.

Ryan Isaac: Okay. Sounds pretty secret.

Reese Harper: It takes over the stock market when the stock market’s doing bad.

Ryan Isaac: Okay.

Reese Harper: There’s no volatility. You can borrow against it, which makes it even better because it’s your own asset so-

Ryan Isaac: Yeah.

Reese Harper: … you can turn into your own bank basically.

Ryan Isaac: Or you can bypass the evil banks and stop paying their evil interest.

Reese Harper: You can be your own bank.

Ryan Isaac: You can be your bank.

Reese Harper: Yeah.

Ryan Isaac: It’s my dream since a little boy, I want to be my own bank.

Reese Harper: Duh. It’s the best thing ever.

Ryan Isaac: Yeah, that’s the secret sauce.

Reese Harper: I can’t believe you haven’t even heard about it.

Ryan Isaac: Yeah.

Reese Harper: That’s the secret sauce.

Ryan Isaac: Okay. Do you want to elaborate on technically what’s happening there? What’s this process then because you’re saying that’s how life insurance is sold as a unique product that has something that other things do not have. You can buy this thing, and put money into it, and it will grow without ever risking any losses. You can also take the money out tax free, so you get, what are the buzz words, what are the marketing terms? Tax free retirement?

Reese Harper: There’s infinite-

Ryan Isaac: Infinite banking.

Reese Harper: …infinite banking.

Ryan Isaac: Be your own bank.

Reese Harper: There’s tax free retirement.

Ryan Isaac: Aren’t these cows too?

Reese Harper: That’s Garrett Gunderson’s kind of … Killing Sacred Cows is his book but his book’s broader than about insurance.

Ryan Isaac: Okay. I wouldn’t lump that in there.

Reese Harper: I would. He definitely has a strong advocacy for insurance.

Ryan Isaac: Okay.

Reese Harper: I don’t know if that’s changed the last few years, but I would say that ultimately there’s just a bunch of different buzz words around. I think that one of the things that kind of happened that stimulated this article that in a couple of forums, it’s amazing how this question keeps coming up and basically the question is, “I’ve been told I can borrow money against cash value life insurance tax free. And this seems like a good retirement planning tool, especially since I’m in such a high tax bracket and I’ve maxed out all my other options. What do you think?”
Rather than tackling the whole life insurance thing today, which weren’t not going tackle the whole picture. We’re going to tackle this specific issue of borrowing money against life insurance tax free, and we want to talk about that narrowly. That’s kind of what the article was covering, and some people mistakenly believe that if they can build up this cash value inside of a policy and then borrow against it, it’s a way to tap into this secret sauce and that’s kind of the main secret sauce that I was giving you all the reasons, but the narrow reason we’re going to talk about is just borrowing.

Ryan Isaac: Okay.

Reese Harper: There’s a system called Leap that advisors, or insurance brokers actually use, it’s incorporated into their presentation materials. There’s courses on it. There’s a trademark called Bank on Yourself.

Ryan Isaac: Oh, that’s a trademark.

Reese Harper: Yeah.

Ryan Isaac: Okay.

Reese Harper: There’s a trademark called Infinite Banking.

Ryan Isaac: Yep.

Reese Harper: The kind of popularization of “be your own bank” is a thing that goes around a lot, and what that essentially means is, that if I have this pot of money, and it’s my money, why don’t I borrow against that money that I have, and then that money can keep growing because I’ve borrowed against it, so the money will keep growing. Then I’ll use the money that I borrow, since I’m borrowing from myself, I’ll use it to go by something else and make even more money. It’s like a way to leverage returns. So that’s what banks do, they take money, and then they go and lend it and do other things with it to make it go faster. But their money grows in double-time, like a Texas two-step.

Ryan Isaac: Ah yes, that takes me back.

Reese Harper: If you think that it is the only way that kind of a thing can happen is through life insurance, there’s a lot of other ways that that actually happens in other investments that you’re currently owning, but you’re probably not thinking of it the same way because this life insurance thing gets presented with some new terminology right? Now it’s Infinite Banking, it’s Leap, it’s Be Your Own Bank, it’s Bank On Yourself.

Ryan Isaac: Yeah.

Reese Harper: And it’s this new thing. It’s not life insurance now. It’s a banking system.

Ryan Isaac: It’s a banking system.

Reese Harper: It’s like “Wow.”

Ryan Isaac: It is.

Reese Harper: Really intelligent clients of mine come and talk to me and I’m just like blown away at how stoked they are about this. When they’re describing it to me I’m like, “Do you hear the words that you’re saying? This is not this system?”

Ryan Isaac: It’s not a unique system.

Reese Harper: It’s not unique to life insurnace.

Ryan Isaac: Yep.

Reese Harper: And it’s-

Ryan Isaac: Not efficient this way.

Reese Harper: …not what they’re telling you it is, and so we kind of want to talk about the myth of this borrowing against yourself.

Ryan Isaac: The first thing we’ll get into in the article that you wrote, you mention two other pretty common things that people have access to that work the exact same way, and with more efficiency too. The first thing I just wanted to say, when I hear about this “be your own bank” thing, replace the bank, I always think, “But the bank has money.” To be your own bank you have to have a lot of money in something to be your own bank, you know? And when you’re funding a product whose costs and commission steal that money for the first bunch of years, you can’t be a bank if there’s no funds in the bank. It takes a long time to be your own bank if it’s really expensive and the bank’s stealing the money. Charging you in fees up front.

Reese Harper: If the bank said, “Let’s just compare the two banks.” If you have one bank that says, “All the money you put it the bank you get.”

Ryan Isaac: And in the bank of Sir Ryan Isaac, you don’t.

Reese Harper: Then you have another bank, it’s like “Hey for the first year all the money you put in this bank, we’re going to keep because it’s expensive to operate our bank.” And you’re like, “That’s cool. It’s cool, guys, you guys are a good bank I’m sure. You’ll make it up to me sometime down the road.”

Ryan Isaac: And they also say, “Look, you’ll break even in about a decade, okay?”

Reese Harper: Great bank.

Ryan Isaac: Yeah.

Reese Harper: That’s the bank-

Ryan Isaac: If you put a lot of money in here really fast, maybe seven years.

Reese Harper: Yeah. And-

Ryan Isaac: But it might be 10 to 15.

Reese Harper: And in some cases if the broker doesn’t get paid as much, because a lot of times the broker can control their commission through these products, then it might even be a little bit faster than that.

Ryan Isaac: Okay.

Reese Harper: But you’ll still have surrender charges, and some penalties, and it isn’t efficient. That’s most life insurance. There is some life insurance, that is commission free. There’s some life insurance that’s loaded.

Ryan Isaac: Which we’ll talk about in a little bit.

Reese Harper: All of it’s not this way, but either way-

Ryan Isaac: There’s some inefficiencies-

Reese Harper: There’s some inefficiencies in life insurance period.

Ryan Isaac: Let’s get to the two really common products that most people have.

Reese Harper: Yeah.

Ryan Isaac: Not products, but things that people have in their lives that operate the exact same way as borrowing against life insurance, is what I mean.

Reese Harper: Yeah.

Ryan Isaac: But are more cost effective and a lot more efficient.

Reese Harper: Yeah the first one that I think, and the reason in the article I’m kind of highlighting this, is I’m trying to make sure that people see how this is not a secret thing, but it could be done in a different way much less expensively, so I just used two examples, and that’s what we’ll talk about today.
One is real estate.

Ryan Isaac: Yep.

Reese Harper: That’s a bank that has actual money in it-

Ryan Isaac: It’s a house bank.

Reese Harper: … usually.

Ryan Isaac: Yeah.

Reese Harper: It’s a pretty efficient market, I’d say it’s a much more efficient market than life insurance because you buy the house and you pay the property tax and that’s generally your cost.

Ryan Isaac: And there’s hundreds of buyers and sellers at any given time in your own community, exchanging these houses.

Reese Harper: Let’s say you’ve got a house that’s $500,000 and you want to borrow money against that house. The house still grows just like the life insurance policy still grows if you borrow against it, but the loan against the house actually has some special tax advantages that the life insurance loan does not have. The house actually has a higher rate of return than the life insurance policy does. Real estate historically has a significantly higher rate of return than life insurance does.
If you’re trying to be your own bank, borrowing $100,000 from your home equity or from a practice building or from a condo and then investing that money in something else and getting it to leverage and grow would be much more efficient than borrowing it from life insurance. For a lot of different reasons.

Ryan Isaac: So you have real estate and you can get it through home equity loans, cash out refinances, older people can do it through reverse mortgages-

Reese Harper: Yeah.

Ryan Isaac: … and use it for retirement funds.

Reese Harper: Yeah.

Ryan Isaac: And investors can use it like you said, in tax deductible ways, like taking cash out of one property and putting it into improvements or other properties, other investments.

Reese Harper: Yeah, that’s ways to access the capital but specifically, comparing it to life insurance, like a reverse mortgage can be a little different, a cash out refi can be a little different. Borrowing money as a home equity line or a line of credit against property is probably the most closely comparable item just because you’ve got a variable interest rate or a fixed interest rate. You can pay it back. You can borrow more, but I like it better just because you can borrow… it’s a much less expensive transaction and you have a rate of return on the property that’s always going to be more optimal than what you’re going to get from a bond portfolio.

Ryan Isaac: Yeah.

Reese Harper: And keep in mind, we won’t go into this today, but a life insurance policy is primarily just a bunch of bonds that are growing at three to five percent a year at best before fees and expenses.

Ryan Isaac: Yeah. The second one are after-tax brokerage accounts.

Reese Harper: Yeah. An investment account like if you have $100,000 investment account or a $200,000 investment account or whatever, the larger your account, the more borrowing power you’ll have. Just like the larger your house is or the larger your life insurance policy is the more borrowing power you have. You can borrow money against an investment account and use that to invest in something else and create that same leverage.
The big argument behind the life insurance is, man, there’s no way, you can borrow money against this pot of money that’s yours, and you can go and buy a car with it, that’s one of the things you hear written a lot. You could finance your own cars with it!

Ryan Isaac: I don’t know, my car loan was like 2.7%.

Reese Harper: If you’re going to borrow money against something, and you’re going to incur some debt, you better get some leverage out of that. That’s why you get a student loan, is because you can go be a dentist, you can make more than the average person. You can borrow money for a business … you wouldn’t want to borrow money from something to go buy something that’s going to depreciate, like a car. But you hear that a lot, you know, from life insurance advocates. “No more borrowing for cars!” That’s not a very great way to create leverage. If you’re going to be your own bank, you’ve literally got to borrow against that life insurance policy, go buy a business with it, or go and invest in something that’s going to get a higher rate of return.

Ryan Isaac: Yep.

Reese Harper: Go leverage that thing. If you’re really adopting that philosophy. I’m not saying that’s a good thing, I don’t really think you should borrow money against your investments to go create more return unless you’re very, very very sophisticated and it’s part of a very detailed-

Ryan Isaac: Well thought out-

Reese Harper: … plan. But man, you definitely don’t buy cars with it and-

Ryan Isaac: That’s what the interesting thing though-

Reese Harper: “Pay for your own trip!” Like you can finally pay for your own trips with it. I’m like, “Fuck that.” Consumer spending now on it.

Ryan Isaac: Yeah, yeah. What’s interesting, I just don’t think a lot of people realize how easy it is to replicate the active borrowing against your own assets inside of a brokerage account.

Reese Harper: Yeah.

Ryan Isaac: It’s called a margin loan, oftentimes they’re very … let’s talk about this for a minute. This is another thing you highlighted in the article was, inside of life insurance, you do not have competitive market forces.

Reese Harper: Yeah.

Ryan Isaac: You cannot just pick up and take your life insurance policy to another carrier easily. You can pick up and take your entire brokerage account from Charles Schwab to TD Ameritrade to Fidelity overnight.

Reese Harper: That was kind of-

Ryan Isaac: No fees and no penalties, you can just move.

Reese Harper: I think that’s a critical point. You want to invest money in things that are competitive and you want to borrow money in markets that are competitive. The life insurance company actually controls both sides of that equation.

Ryan Isaac: And you can’t leave easily.

Reese Harper: They control the returns on the investment, they control the rate of borrowing, and then they also apply carrots and sticks, sticks primarily, meaning if you try to get out, there’s a penalty. If you try to leave, you’re going to lose some money. When you make that decision, that’s why people, the argument, “Life insurance is a guaranteed savings plan.” Sort of. I would think it’s sort of a forced kind of controlling overly-

Ryan Isaac: You’re now in a savings cult.

Reese Harper: It’d be like, if your parents were like, “You could make any choice that you want, but if you want to go to this school, we won’t pay for college. But here we will. But make any choice you want.”

Ryan Isaac: Yeah.

Reese Harper: “If you want to buy that car, then we’re not going to pay for it. Only if you buy this car, but do whatever you want to do.”

Ryan Isaac: Yeah.

Reese Harper: You make a decision to go with an insurance company to follow the strategy, you’re stuck there because if you don’t like their rate of return that they’re getting on their bonds? You don’t like their crediting rate? Sorry. You’re stuck. You don’t like their borrowing interest rate? You don’t like the contractual requirements of their policy? You don’t like the surrender charges? You don’t like the-

Ryan Isaac: What are you going to do?

Reese Harper: … the liquidity they allow? You don’t like the-

Ryan Isaac: Go take a new medical, do a new application, open a new policy at today’s rate-

Reese Harper: Take a surrender charge, pay taxes on your gains.

Ryan Isaac: That’s the other thing. You don’t like the policy that’s seven years old? You’re going to apply for a new one to move it, but you’re seven years older, now you’re rates are more expensive.

Reese Harper: Yeah.

Ryan Isaac: The costs are even higher.

Reese Harper: Yeah. So you won’t leave. It’s like the ultimate confirmation bias, like sunk cost bias. You’ll never leave it. It’s not competitive. It’s just not a competitive… you could say out front before anyone buys it, it’s competitive. When I’m picking between 10 companies, at that moment I can shop. But once I’m in, the insurance company has really not-

Ryan Isaac: It’s a saving cult, that’s what I’m saying.

Reese Harper: They don’t have a ton of incentives.

Ryan Isaac: You can’t leave.

Reese Harper: You can’t get out. In order to be something that’s helping the public, you need to be something that doesn’t trap the public. You need to be something that’s like, “Come and go as you please. You could use this or not use this.” That’s why people love apps and SAS model apps and that’s why they love our planning service. It’s just month to month. If weren’t not adding value, you can not do it.

Ryan Isaac: Just don’t do it.

Reese Harper: But if you don’t keep doing the life insurance, you’re kind of in trouble.

Ryan Isaac: Yeah.

Reese Harper: I think the same thing with… you kind of have to realize the same thing to a lesser degree sometimes happens with your home mortgage. Everyone loves real estate because they end up having a lot of equity in it, and they like their life insurance policy because they have equity in them, because they’re like massively forced savings programs [crosstalk] with massive downsides [crosstalk]

Ryan Isaac: And the house you live in.

Reese Harper: But I mean-

Ryan Isaac: Oh you’re going to go?

Reese Harper: If you take a vehicle like a mutual fund portfolio, and you say, “Look, you don’t have to put money in, you can take it out at any time. It’s completely flexible and there’s no penalty or withdrawal fee when you’re using a fee-only fiduciary. It’s the ultimate flexibility, you know?

Ryan Isaac: Yeah.

Reese Harper: And for a lot of people that just doesn’t work.

Ryan Isaac: Yeah.

Reese Harper: It doesn’t work because it’s not-

Ryan Isaac: It’s too subject to human behavior.

Reese Harper: …it’s too flexible. Now if you get some accountability from an advisor, a lot of times-

Ryan Isaac: You’re chances go up.

Reese Harper: …it’ll happen. That’s the reason, if you hear someone who likes what they’ve got, they like it because it’s probably one of the only things that they’ve got, that they’ve stuck with. If you argue it on the merits of the actual investment, it doesn’t really hold water.

Ryan Isaac: Yeah.

Reese Harper: I just don’t like the fact that you can’t be flexible and move and change and in a brokerage account, like you were saying, the brokerage house, let’s say TD Ameritrade, for example. They’re a brokerage, they make money on whether your money’s there or not. They make money on your money market deposits, they make money on some of the trading costs, so if you see them encouraging you to look at CNBC and download these apps, keep in mind some of these brokerages make money when you trade.

Ryan Isaac: Yeah.

Reese Harper: So the more you trade, the happier they are. They like a lot of active traders.

Ryan Isaac: They like giving you free charts to encourage your trading.

Reese Harper: Yeah, like, “Dude, look at these indicators.”

Ryan Isaac: “Look at these candlesticks. Check out our candlesticks.”

Reese Harper: “Yeah, you’re gonna love this.”

Ryan Isaac: “Just follow this-”

Reese Harper: “Green light red light.”

Ryan Isaac: “Just follow these.”

Reese Harper: There’s some conflict of interest there.

Ryan Isaac: But you can pick up and move at any time, right? You don’t like their trade costs? Then move to Schwab. There’s literally a button you can push, that will-

Reese Harper: You got to Schwab and you open up-

Ryan Isaac: …and it won’t even sell anything. It just moves your account, all the positions. It doesn’t sell anything, it just moves it to a new place.

Reese Harper: And that does not cost any money.

Ryan Isaac: No. There’s no surrender fee for that. You just move it.

Reese Harper: It might cost a transfer cost. It might be $30, or maybe [crosstalk] most of the time there’s nothing. But sometimes TD Ameritrade will charge you a small transfer fee for moving your account.

Ryan Isaac: Give them 20 bucks.

Reese Harper: It’s not-

Ryan Isaac: Just hand them 20 bucks.

Reese Harper: Most of the time there’s not, you know?

Ryan Isaac: Yeah.

Reese Harper: It’s not big enough to deter someone from moving for sure.

Ryan Isaac: Not at all.

Reese Harper: It’s like if your life insurance company is like, “Yeah you can have all your money back and do this it’s 20 bucks.” [crosstalk] Most of the time it’s like “Well the first year you lose all that money it’s gone now. And you’ll never get it back.”

Ryan Isaac: Yeah. Oh yeah.

Reese Harper: Anyway. You can just move stuff. It’s so portable. It’s so nice, so easy.

Ryan Isaac: And that creates competition.

Reese Harper: Yeah.

Ryan Isaac: Because when consumers have more options and there’s more companies competing for it and the other company has to offer better charts and better trades and more free trades.

Reese Harper: That’s why the insurance company market is not advancing as fast as the rest of the technology in the investment world. You can borrow against your investment account at a much lower rate than you’re going to be able to borrow in a life insurance environment, by far. If you have a large account, especially-

Ryan Isaac: We’ve seen those transactions for clients where they’ve, large clients accounts, talking about large brokerage accounts-

Reese Harper: Yeah.

Ryan Isaac: … over $500 or more and they’re taking out a margin loan against their own money to pay off higher interest second mortgage or a student loan.

Reese Harper: Practice debt.

Ryan Isaac: Practice debt. But they’re very competitive market rates.

Reese Harper: Yeah, you’ll have a-

Ryan Isaac: Or sub-market.

Reese Harper: … yeah, you’re going to be in the low single digits in a lot of cases. It depends on the size of your account. I’ve seen stuff in the twos.

Ryan Isaac: Yeah.

Reese Harper: That’s a low interest rate environment, granted, but you’re borrowing against your life insurance policy. A lot of times the true costs of borrowing inside of that product are significantly higher. You’ll see fixed rates as high as eight percent. Or variable rates that don’t drop below six percent ever. In cases where the carrier says there is no interest rate that they tie to their borrowing. They’ll be like, “It’s called a zero wash loan.” You might’ve heard of that or a zero-wash product, or a wash loan product. What that means is, we don’t charge you any interest for borrowing. Well, when they control the return on the investment [crosstalk]. If you don’t want to pay us interest on the borrowing, then we just won’t credit you as much on the return.

Ryan Isaac: It’s like cars that don’t have interest rates. It’s like-

Reese Harper: Zero percent interest rate for five years!

Ryan Isaac: [crosstalk] Just pay us an extra three grand! The car is five grand more expensive.

Reese Harper: Don’t them play games with you, people. You have to know these businesses need to make money, and when you go to an insurance company and you’re like, “Hey, you have my $100,000 in cash value, I’m going to borrow it away. I’m going to take it physically away from you.”

Ryan Isaac: Yeah.

Reese Harper: Well now they don’t have it. They don’t physically have the cash, which means they can’t report that they do have it, and it lowers their ability to lend more money, because they have to keep a certain amount of liquidity on their balance sheet. So if you’re taking money away from them, they’re not like, “Take it. We’re fine.” They actually want to discourage that. That’s not a good thing for them. No financial institution makes more money when you don’t give them your money, when you’re money’s not there. They become less liquid, they can’t leverage themselves as much, they can’t lend out as much, they can’t borrow as much, the return on their assets is lower.

Ryan Isaac: Yeah.

Reese Harper: Everything is bad about that.

Ryan Isaac: Yeah.

Reese Harper: So no one wants you to take money away.

Ryan Isaac: Yeah.

Reese Harper: So they’re either going to have to charge you interest. And in the case of a brokerage house like an investment account, I like that the interest is disclosed to you. It’s market rate, it’s competitive, you can choose to pay it or move to a different provider in two days. The interest is usually deducted from your account on a monthly basis interest only.
So it’s like, I need money for 90 days, I can borrow against my investment account, I can pay for this piece of land that I want, and then I’ll just save money on a monthly basis with my new cash flow and just pay off that loan-

Ryan Isaac: And pay off the loan.

Reese Harper: …and every month I’m paying less interest, there’s no origination fee, there’s no underwriting cost.

Ryan Isaac: Yeah.

Reese Harper: You were saying “be your own bank,” this one dominates.

Ryan Isaac: Then be your bank in a brokerage account.

Reese Harper: It dominates the insurance one. I think you have to be very selective about leverage and investing and so…

Ryan Isaac: Something I was thinking about too is, let’s say you have a margin loan out on a brokerage account and you just decide that you don’t want to pay it back one day. All you do is you just sell some securities in your account and it’s gone. It wipes out. If you have a loan outstanding on a life insurance policy, it’s a little bit tougher, especially if the loan gets a little bit bigger, right? Because what happens is if you don’t have enough cash value to just say “Take care of it,” then something’s got to happen there. Or if you do, but you wipe out all your cash value, you still have this thing you have to put premiums into. So even while the loan exists, you still have to keep the thing alive to keep that loan from becoming taxable.

Reese Harper: Yeah.

Ryan Isaac: Because if you stop paying the policy while the loan’s out…

Reese Harper: The thing you’re highlighting is some inherent cost from the life insurance [crosstalk].

Ryan Isaac: More complexity, yeah.

Reese Harper: You didn’t buy an asset when you bought insurance.

Ryan Isaac: Right.

Reese Harper: You bought a liability.

Ryan Isaac: Yeah.

Reese Harper: And it has a savings account component attached to it, but life insurance is, there’s cost of insurance forever. Even though it’s whole life or variable life or some permanent insurance, every month the insurance company has to account for the cost of you being 74 years old.

Ryan Isaac: Yeah.

Reese Harper: So if they’re not collecting money, just keep in mind your $500,000 sitting there, there’s some cost that they have to account for. In a brokerage account that’s not the case. There is no inherent cost of having $500,000 in a brokerage account. In a life insurance policy-

Ryan Isaac: It’s an asset just sitting there. You could cover it if you wanted to.

Reese Harper: It’s much simpler.

Ryan Isaac: I guess that’s what I’m getting at.

Reese Harper: In the life insurance policy the point I want to highlight is you really don’t have something that’s cost free ever. If you start borrowing a lot of money against that, and the different between what your cash value is and what your loan is become really close-

Ryan Isaac: Yeah.

Reese Harper: … and there’s still cost, which there is-

Ryan Isaac: You’ve got to still keep [crosstalk]

Reese Harper: …you’re going have to be feeding it.

Ryan Isaac: Yeah.

Reese Harper: It’s kind of like if you had a house that was worth $500,000 and you got a home equity line against it for $400 and change, and the interest rate on that home equity line was higher or at close to what the rate of the property was worth and you have a repair. You’ve got some property tax. You’ve got some maintenance. You’ve got some ongoing-

Ryan Isaac: Yeah, you can’t just let it-

Reese Harper: You can’t just be like, “Oh it’s fine.”

Ryan Isaac: Or you might sell it and pay it off, “I don’t want to do it anymore.”

Reese Harper: You could sell the house, and you could sell the policy.

Ryan Isaac: Yeah.

Reese Harper: But you have to make more extreme changes.

Ryan Isaac: They’re harder.

Reese Harper: Yeah, you have to make an extreme change. You have to either say, “I’m done with this policy, or I’m going to get rid of my death benefit and not have as much. I’m going try to cut the policy down.” They’ll create a taxable event.

Ryan Isaac: Yeah, right.

Reese Harper: It is much more complicated.

Ryan Isaac: I guess it’s a point. I listed five takeaways here out of these things. One takeaway, number one would be, if you want the borrowing capabilities off of an investment, do it on your own terms. Do it inside of a brokerage account, in a competitive environment.

Reese Harper: Do it with your real estate.

Ryan Isaac: Do it with your real estate. We didn’t talk about this too much, but another big reason why people-

Reese Harper: Let’s back it up to that, on real estate, it’s also competitive there too.

Ryan Isaac: Well yeah.

Reese Harper: On the lending side of real estate, it’s hyper competitive.

Ryan Isaac: It’s insane.

Reese Harper: I just think it’s important to highlight.

Ryan Isaac: There’s apps that’ll do your mortgage for you.

Reese Harper: It’s just way more efficient.[crosstalk] Good luck trying to find the interest rates are for the top 50 life insurance companies across the country in their policies.

Ryan Isaac: Yeah.

Reese Harper: That’s never going to be public data. I promise you that’ll never be public data.

Ryan Isaac: You heard it here first.

Reese Harper: It’s against the insurance companies interest to make it that way.

Ryan Isaac: I feel like you should ring the gong on that one. That one was a prediction.

Reese Harper: C for chi?

Ryan Isaac: Really? A C for a prediction?

Reese Harper: I only do C for chi if I’m getting stressed.

Ryan Isaac: No that was a prediction. What’s the middle one there?

Reese Harper: E for everlasting. And then G is…

Ryan Isaac: I like G.

Reese Harper: G is for good.

Ryan Isaac: That was good. It’s a good prediction.

Reese Harper: Goodwill and faith on earth. That’s a G.

Ryan Isaac: We’re mixing a lot of holiday parables here. Second thing is, we didn’t talk about this too much but one of the reasons people also buy the insurance to borrow it is because they view it as this conservative vehicle that can’t lose money. You were saying this a little bit earlier and you hit this in your article. You can build the same portfolio on your own. If you want a conservative portfolio you can also borrow against, you can construct that, recreate it very simply. You can buy the same investments the insurance company’s going to give you anyway, they just do it simpler.

Reese Harper: Go to Google any life insurance company, if you have a whole life policy right now, just go to Google and Google the name of your insurance company and then put “general account investment allocation” or “portfolio allocation” for that insurance company, you’ll see a pie chart, it’ll show you how they invest money and you’ll see that it’s largely government bonds, corporate bonds, and a few other mortgage backed bonds. So you’ll see mortgage backed bonds, corporate bonds, government bonds. That’ll make up, in most cases, north of 90% of the portfolio.

Ryan Isaac: And then a little bit of private-

Reese Harper: Sometimes you’ll see some private debt.

Ryan Isaac: Yeah.

Reese Harper: A little bit.

Ryan Isaac: Really conservative, private bonds basically.

Reese Harper: Yeah, and then you’ll see a teeny bit of stock market. You’ll see public securities in there for a low single digit percentage.

Ryan Isaac: Yeah.

Reese Harper: And this is my main thesis, is if you took away commissions from life insurance-

Ryan Isaac: Where would the demand be?

Reese Harper: … what kind of insurance would people buy? I know they’ll still buy term insurance.

Ryan Isaac: Yeah.

Reese Harper: We all know that we want insurance. Question is, would people buy cash value based life insurance if there was not commissions? And I think I’ve seen that in evidence and the answer is no. They just wouldn’t, and it’s because there are more efficient, better alternatives in the investment market that the competitive nature of that market and technology are just creating better options. If I can replicate the portfolio of the life insurance company in my brokerage account for a tenth of the cost-

Ryan Isaac: Yeah, reduce your cost and your complexity and have portability wherever you want to take your money and still be able to get the benefits of borrowing?

Reese Harper: In the last line of this-

Ryan Isaac: I was going to say, bring us home with is.

Reese Harper: … the last line of this article, I just want to read it to you because it was something I thought a long and hard time about.

Ryan Isaac: It’s number five here on, oh you got it there.

Reese Harper: I said, “This strategy used to be a relatively attractive investment prior to the internet and the massive availability of credit and investment opportunities that now are available to consumers.”

Ryan Isaac: Used to be?

Reese Harper: Prior to everything that exists today, this actually used to be a decently attractive thing. And I believe that. In the early 1900s.

Ryan Isaac: Okay, on that point, one of my all time favorite Christmas shows since we’re here is “It’s a Wonderful Life.” We watch it every Christmas Eve, it’s like our tradition. When he’s sitting in front of Mr. Potter and George Bailey’s like, “You need a loan from me, what kind of collateral do you have, George?” And George pulls out a life insurance policy, it’s the late 1920s, and he says, “I have a $15,000 policy with $500 of equity in it.”

Reese Harper: Yes.

Ryan Isaac: It used to be the viable way to build some equity in something.

Reese Harper: It was. You didn’t have options-

Ryan Isaac: Shout out to George Bailey.

Reese Harper: …to save money in a safe investment back then.

Ryan Isaac: Yep.

Reese Harper: And man, I’m grateful that our economy has insurance companies. I love that they exist, I carry a lot of life insurance and it gives me a ton of peace of mind and my disability gives me peace of mind. I feel it’s valuable. At one point cash value accumulation made sense inside of a policy and just doesn’t anymore.

Ryan Isaac: Yep.

Reese Harper: So the final line I used a Bob Dylan quote. I said, “Times, they are a-changing-”

Ryan Isaac: You going to sing it?

Reese Harper: …”And anyone caught up in the strategy in recent years is severely under informed.” Which just means, you don’t have enough information if you think this is a good thing right now. There’s plenty of information on our website, and we’re not the only people that will tell you this. You don’t want to be borrowing money from life insurance and creating a tangled web of leverage that’s somehow going to make you be in a better spot. And if someone’s telling you this stuff, you’ve got to run. This is not a good person.

Ryan Isaac: Run to safety.

Reese Harper: Just got to places where you have a fee-only fiduciary who doesn’t get paid to sell you this stuff, giving you advice. Don’t get caught up in this old game from the 1980s or the 1890s-

Ryan Isaac: It’s like the Big Mac, times are a-changing, there’s not as much demand for that kind of food anymore, quote unquote.

Reese Harper: Yeah. But I’m grateful it was there, man.

Ryan Isaac: It served its purpose.

Reese Harper: It did. And it helped us grow to the place we’re at now. And some of the big insurance companies, they’re pivoting, they’re changing, they’re trying to rethink things.

Ryan Isaac: Yeah. Have to.

Reese Harper: Just don’t get caught up in this.

Ryan Isaac: All right. If you would like to post any questions about your… maybe you have some insurance questions or policy you have, you can post some questions. We have a forum and you can go to dentistadvisors.com/group, it’ll take you to our free Facebook forum full of very smart and wonderfully nice dentists, and there’s polls and questions and discussions going on there all the time. Go in and post a question and we’ll answer on an upcoming show or just directly there in the forum.
If you want to talk to us one on one, you can schedule a time to talk to one of our advisors. Just go to dentistadvisors.com, click on the button that says “Book Free Consultation” and book something for your lunch break or break between patients or your day off. We have a lot of availability on the calendar so it’s dentistadvisors.com. Or you can call or text us anytime you want at 833-dds-plan.

Reese Harper: Carry on.

Insurance