After my video on whether to pay cash or finance an ATV, a viewer asked me a fair question. Why would I finance through the bank when I could borrow from my own policy? Wouldn't a policy loan cost less once you count everything? That question got a whole video on why I chose a bank loan over my policy.
First, when I say I'm paying cash, I mean money from my life insurance policies, where it's growing. I keep very little in checking. I also have a home equity line of credit, or HELOC, and I use the two together. A transfer from my HELOC is instant. Money from my policy takes about two days to land. So when I pay cash for something, I usually move money from the HELOC to checking, pay, and then pull from the policy to pay the HELOC back as soon as that money arrives.
For the ATV, here were the numbers at the time. The bank offered 4.49% with no loan fee. A policy loan would have cost me 6%. On that policy, the money I borrowed against kept getting credited about 6% too, so a policy loan was roughly a wash, which means the cost and the credit about cancel out. The bank loan was cheaper than that. And my $8,000 could stay in the policy earning the dividend rate, which was 5.65% at the time. That's a spread in my favor of about 1.16%, which on $8,000 comes to roughly $93 a year. Those rates were from when I made the video. Bank rates, loan rates, and dividend rates have all moved since, and dividends aren't guaranteed.
The bigger reason is control. If I borrow from the policy to buy the ATV, my available cash value drops by $8,000, and I own an $8,000 ATV free and clear. That equity in the ATV doesn't do anything for me, and it loses value every time I ride it. If the bank lends me the $8,000 instead, I still own the ATV, and I still have $8,000 of cash value I can reach whenever I want. I could pay the bank off tomorrow, or use that money for something better. I have more options with the money in my policy than with the same money sitting in a vehicle.
A lot of infinite banking talk says to get the bank out of the equation entirely. Infinite banking means using your own policy as your source of financing, and Nelson Nash, who wrote Becoming Your Own Banker, talks a lot about control. I don't think you have to cut the bank out to be in control. You're in control as long as you have enough money on hand that you could cut the bank out if you wanted to. Here, keeping the bank in the deal gave me the lower rate and kept my money liquid.
A policy loan is still a loan, and it reduces your cash value and death benefit until you pay it back. Sometimes it's the better choice, like when the bank's rate is higher or its approval is slow, and the times a policy loan is the wrong move covers the rest. A bank loan comes with an approval, a payment schedule, and sometimes fees, so compare the full cost every time. Choose your credit tool before you need it helps with that.
Next time you finance something, compare three rates before you pick: the bank's rate, your policy loan rate, and what your cash value is being credited. If the bank's rate is lower than both of the others, your money can stay in the policy where it's growing.