A whole life insurance operating note-- what is it, why is it important, and how would I implement it as a business owner?
Well, ladies and gentlemen, the whole life insurance operating note is one of the best kept secrets in finance. A whole life insurance operating note gives YOU the flexibility and control to use your money the way you want without answering to a bank! You don't have to go to a bank and beg on your hands and knees anymore for a loan to run your business.
We know in today’s day and age that banks are going to start clamping down on lending-- they have to. With all the loan forbearances and eviction stays in place with COVID relief, the banks are getting hit hard. Not only are they not getting paid on millions of loans, but they have no recourse to do anything about it. They can't evict anyone. They can't repossess the property and resell it-- their hands are tied.
Don’t get me wrong, I'm not a fan of banks and their lending practices, but they have a business to run, just like the rest of us. The good ole ways of running a business are going bye-bye. They should. We don't keep books, advertise, or farm the same way we did 100 years ago, so why are we financing our business the same way?
A whole life insurance operating note is nothing new. Companies like Disney, Kentucky Fried Chicken, Pampered Chef, and McDonald’s all started with whole life insurance. Walt Disney was turned down 302 times by lenders before going to his whole life policy. I'll bet those bankers are wishing they would have taken a chance on him now. You know what though? All these companies enjoyed success without having to worry about operating under a bank’s terms.
To my farmers out there, how nice would it be to get a check from the elevator with just your name on it, no bank. Below we will list the top 6 reasons why a whole life operating note is the king.
1) Trust/Control – Don't glance over this one. Trust is a huge thing, especially when dealing with money. Who do you trust more than yourself? Do you think the bank will always be there for you? The easy answer is no-- they have balance sheets and risk assessments that they must run and follow.
You know who you can trust to give you a loan? Yourself.
Trust in one’s self has been paramount to some of the greatest companies out there. No one will spend someone else’s money as well as they will spend their own. You will be diligent with your own money. You know where it needs to go. No longer do you have to go to the bank for approval or hide that new car you claimed was machinery to spend your operating note.
2) Security – There is no single entity out there that is more secure than a life insurance company. Don’t believe me? Do some research and you will see that banks do not have large vaults piled up with their money-- they give it to life insurance companies to hold.
No other entity is built around risk assessment like a life insurance company. All of the really good ones have been around for over 100 years and have paid their clients dividends every single year. If an insurance company does go belly up, they are NAIC insured not FDIC insured. In other words, more of your money is protected than it would be if it were sitting in a bank account.
3) Protection – A life insurance policy is protected. It's protected better than Tom Brady in a playoff run. A life insurance policy cannot be touched by the IRS, by debt collectors, and God forbid you are ever in a serious accident, it is protected from lawsuits. It is by far the best place to store your money until you need it.
4) Earn Interest – While you are filling up your operating note your money is using interest. Every time you take a policy loan YOU are earning interest. After all, why is the bank’s money more important than your own?
Let's compare a whole life policy to a toilet (I promise this will make sense!).
We all know how a toilet works in the simplest terms. You put what you don’t want in the bowl, flush it and the water in the tank on the back drops in level. This is how a life insurance policy loan works. You put what you do not want in the bowl, the debt. We take a policy loan from the cash value (the tank) and we flush the debt/bills away. When we pay ourselves back, the access to cash value increases (water in the tank) so that we can flush the next expense. The big difference, however, is that each time we do this, the tank on the back of the toilet gets bigger and bigger allowing us to flush larger expenses. This is how you can guarantee your own business will have the funds to grow over time.
5) Save Interest – We all hate losing money. We especially hate losing money we feel we have no control over. This is probably the biggest advantage to a whole life insurance policy for an operating loan.
Every year business owners lose millions of dollars in interest. This is something most business owners feel is a necessary evil. Well, it's not. When you take a loan from yourself through an insurance company you will pay them interest, but the money in your cash value acts as though you never touched it. The money in the cash value column grows whether you access the money or not, with the right insurance company. When properly structured you can not only deduct the interest you pay the insurance company back, but also the interest you pay yourself back!
Let me demonstrate how this works:
You take a loan for $50,000 from your life insurance policy. The cash value in your policy will grow as though you never touched it (you won't have access to all of it though). Now let’s say the life insurance company charges you 5% interest on the loan and it takes you 5 years to pay the loan back. You will pay the life insurance company back $6,613 in interest. Now, the insurance company is paying you 6% dividends. So, by the end of the 5 years you would earn $8,800. That is an additional $2,187 you did not have before. Is your bank going to do that? That is not the best part-- you can charge yourself interest on top of that... and it is tax deductible!
6) Tax Advantages - A lot of business owners believe that the normal operating notes from the banks have an advantage of being tax deductible. Big whoop! You lose $6,613 in interest and get to file 25% back.
Let's look at a whole life insurance policy operating note. We talked before that you can pay yourself interest and it is tax deductible. If we look at the example above, we are already paying the insurance company 5% interest. This is tax deductible just like the bank note, but we can charge ourselves interest on top of that! The IRS states that we can charge ourselves any reasonable amount of interest. If you were to get an operating note at the bank the interest rate would probably be closer to 7% to 8% interest.
Let's figure that we are going to pay ourselves an additional 5% interest. We know that 5% is going to the insurance company, but where does the other 5% go? You can put it anywhere you want. That's right, you are essentially taking $6,600 from your left pocket and putting in your right pocket and deducting the interest! Now you are making that 25% deduction without losing anything.
Whole life insurance policies used for an operating note can be an extremely valuable asset. We did not even talk about the death benefit that is backing everything up should something happen to you before you pay the loan back. What would happen if you had a large sum out on your operating note at the bank? The family would be held responsible, that is what would happen. It is worth taking a look to see if this is an option for you.