What If the Cattle Market Collapses? Why Debt-Free Isn’t Enough (Ep. 378)

“Mary Jo, what if it all falls apart? What if the cattle market just collapses? I don’t want to have the debt.” And I said, “If cattle prices drop, the whole market falls apart. Your cows aren’t worth anything, your trailers aren’t worth anything, your squeeze chute’s not worth anything, because who’s going to buy it?” So because you are buying all these things and you have them paid off, you think, “Well, good, I have assets.” But your assets are all inside of an industry that fell apart. Those assets aren’t going to be worth what they’re worth today. So that’s great that you’re debt-free, but why are we not putting money through a policy, so that if the cattle market falls apart, that money is earning uninterrupted compound interest and dividends? Putting it through the policy first gives us access to cash. It gives us flexibility to pay it back when we want. We have 100% control. It gives us death benefit as collateral to the loan. It is a better use of our money to run it through that way and then borrow against it and pay it back.

Hello, hello, hello, and welcome back to the podcast. Thank you very much for being here. I got some fun stuff today. Well, I think it’s fun. But I had to wait to record this podcast. I knew I wanted to talk about how cash flows through the policy, but I had a tax strategy meeting with some tax strategists that I’m working with, and I had to explain how money can flow through the policy. So we get a bonus of how an accountant thinks and how I have to do a little bit of teaching on that side, but all is good. They’re willing to learn. So that is another bonus.

I have had a lot of questions recently: “Mary Jo, can you just explain to me how my money’s gonna flow through the policy? Can you just explain to me what that looks like?” My client Nate said, “This is really simple when you quit making it so hard.” And that’s exactly what we do. We make it really, really hard, because we think we’re gonna lose that money. We think we’re gonna pay a premium, and then we lose access to the money. And this CPA had all the same questions that most of you have as well. And so let’s just talk about it.

I’d like to draw it out, but I don’t have a board, and my room’s not big enough to do that. And it’s in the book. This is all in the book. The numbers don’t matter. So when you go to the book, and you’re reading the book, and you’re reading about Anita and, I forget what I titled her husband. Adele and Anita? Anita and… Anywho, when you look at that example, you will see how we’re borrowing money, and we’re paying it back, and we’re borrowing money, and we’re paying it back, and we’re doing the same thing through the kids. And it doesn’t matter if it’s Farming Without the Bank, Life Without the Bank, whatever it is, we’re paying our premium, we’re borrowing the money, and we’re paying it back.

So let’s just use an example, ’cause I had to go through this again the other day. So we have income coming in from our off-the-farm job. We have income coming in from cattle sales, grain sales, whatever. It does not matter where that income comes from. Okay? We use that money to pay our premium. Then we have access to cash value. And I’m not gonna use numbers, because the numbers don’t matter. It’s just a process. We pay our premium, we have access to cash value. We’re going to borrow that cash value, and this is where it matters. What are we gonna use that for?

Let’s say that we use that to buy cattle. If we use that cash value and we borrow it to buy cattle, that is going to produce income. If we have calves to sell, those calves are going to pay back that loan. So a lot of people think, “Well, where does the premium come from the next year?” Well, it comes from the same spot it came from this year. The income is not paying for the loan and paying for the premium in this scenario. The income is only paying for premium. The income from the cattle that we used the loan for is paying that back. Because if we’ve borrowed money and we bought a cash flowing asset, our income is actually higher. So we have more income to make that payment.

Here’s where it gets hairy: if we have the same steady income, we pay our premium, and we borrow cash value for a pickup. That is not a cash flowing asset. So now how do we make that loan payment? We’re gonna have to make it out of the same bucket of income. We didn’t increase income, ’cause we didn’t buy a cash flowing asset that made income bigger, so it’s the same amount of income. If we’re borrowing cash value to buy a pickup, and we can’t pay it back, then we shouldn’t have bought the pickup.

It is no different than if you go to the bank. You can’t go to the bank and say, “I want a loan for a pickup, but I don’t have any money to pay for it.” When we’re starting a policy, we just want to make sure that the premium’s not so high that if we’re going to use it for things like pickups, student loans, braces on the kids, those sort of things, we can’t also make a loan repayment. You don’t go put something on the… Well, some of you might, but ideally, we’re not putting something on the credit card that we can’t pay back. It’s the same thing.

Now, what if I paid my premium, I borrowed cash value, and I wanted to buy that pickup, but I knew that I’m not gonna have the money to pay that pickup back for a year, and then after a year, I know I freed up some other money? Maybe I paid off a loan at the bank with something else, and I know I’ll have the money now to start making a payment back. Great. Then do that. Pay the interest only on the life insurance loan, and then when this money is freed up from this other loan you were paying to the bank, use that money to make this payment. We have a hard time seeing how that goes through the policy because we have this loan.

So as I was talking to this accountant today, I said, “Okay, I can put money in my life insurance policy, and I can deduct those premiums.” This is something that’s new to me. I did not know that. It was called a defined benefit plan, and I’m learning about it, and when I know more about it, I’ll share it with you. But if I can pay premium and deduct that premium as an expense, now I still have access to cash. And he said, “Yeah, but now all your money’s in the policy, and you will have a loan to pay back.” I said, “Yeah. Not a big deal. If I borrow the money from the policy for a rental property or for land or whatever, something that’s a cash flowing asset, I’ll have the money to pay that back.”

And he’s like, “Yeah, but you have to.” I’m like, “No, I don’t have to pay that back. All I want to pay is the interest only, but I don’t have to pay the loan back.” And he couldn’t quite get past this loan. Like, he kept saying, “Loan, loan, loan.” And finally, I called him by his name and said, “We have some teaching to do. I’m not here to debate you on the life insurance. I know in ten days I’m going to have access to a certain percentage of that money. It could be 75%, it could be 50%, but at least I have access to it. Your tax strategy is take the same amount of money and give it to oil and gas or give it to a nonprofit, and it’s gone.” Well, yes, I saved money on taxes, and that’s great, but I don’t have access to any of it.

If I can do the same thing and get access to it, and it’s growing with uninterrupted compound interest and dividends, and I provide a death benefit to my heirs income tax-free, that’s awesome. He’s like, “Well, what happens if you don’t pay it back? What are you gonna do at retirement?” And I’m like, “I shouldn’t take the loan if I’m not gonna pay it back, but if I don’t pay the loan back before I die, it just comes out of my death benefit. What if I don’t plan on retiring?” Because he’s working with people that are going to retire. He does not have the mindset, ’cause he’s not gotten Nelson’s book yet. There’s gonna be two books that go in the mail. He’s not gotten Nelson’s book yet to understand the mindset, and he doesn’t work with farmers normally, so he doesn’t understand the mindset of farmers.

We don’t quit. So I’m planning to probably slow down, but I’m not planning to quit, so there’s going to be cash flow coming in, and I want to borrow that cash value for a cash flowing asset, something that makes money that can pay it back. If I’m gonna buy a short-term rental with it, my tenants or my guests will pay that back. And he goes, “Yeah, until life happens, and then what?” I’m like, “Then I guess I just don’t pay it back, ’cause I’m gonna die.”

And we kept going in these circles, and I was sitting there thinking, “This is kind of what you guys are running into.” When you’re talking to people about life insurance, you’ve read the book, and you can understand what’s happening, but then somebody else makes it really complicated, and then you get confused, ’cause you don’t know it like the back of your hand like I do. So I was able to quickly come back to him and say, “Yeah, but this. Yeah, but that. You’re talking to me like whole life insurance is risky.” And he’s like, “Yeah, but you have to come up with that premium every year.” “Yeah. I do. And when I pay the premium, my cash value increases every year.” So it’s a pass-through entity. It’s not a luxury. It’s not a what-if. It now becomes an expense to do business. We really have to understand and think about all those benefits with it and how that cash flows through the system.

Another thing that I talk about a lot is using it for operating costs. And so if you have to buy seed, fertilizer, feed, chemical, vet bills, all these things that are reoccurring every year, we can do extra premium year one. So now every year after, that premium is not as high, and now we’re using that as our revolving line. If you are using cash, which is typically what happens when I meet with clients, I have a fair amount of clients that are cash only. And so if you’re using cash, you sell a commodity, that money goes into your checking account. You then write a check, and it goes right back out of your checking account. You are doing the act of infinite banking through a checking account. Do you ever say, “Well, I need $300,000 of operating expenses, but I better not use that money in my checking account, because what if I can’t pay it back?”

No. You have $300,000 of operating expenses. You pay for your expenses. You sell your commodity. You replenish your checking account. If you don’t have it, you’re like, “Oh, I guess I’ll go to the bank and borrow money from the bank.” It’s the same thing with the life insurance policy. If you’ve borrowed $300,000 from your cash value, then if you can’t pay it back, your death benefit is collateral to that loan. You can pay the interest only on that. You can skip the interest if you want. Not ideal, but you could. If you don’t pay it back to checking, you don’t have it. If you don’t pay back the life insurance loan, you don’t have it, and you’re having to go to the bank to do the exact same thing.

Adding that extra layer in there is very confusing for a lot of people, and they just don’t understand how it’s all flowing. And so without, like, doing some sort of a skit or charades… I have done PowerPoint presentations about this. Sometimes you just have to do it in order to see it. And my client Nate said that he made it really hard for himself to understand it until he just quit making it hard.

And here’s a fun little story about Nate. Nate, if you’re listening, thanks for the stories. I know you won’t mind if I share. So the funny thing about Nate is that Nate is in his numbers all the time. He eats, sleeps, and breathes numbers. He’s always thinking about infinite banking and how the banking works, and if he should put something through a policy or if he shouldn’t put something through a policy. Nate’s son at the time was 17, 18, 19 years old. He’s also a client now. But he’s like, “Dad, this isn’t that hard. This is what Nelson said. Dad, this isn’t that hard.” Like, Jay got it right away. Well, the reason that Jay got it right away is ’cause he didn’t have 40 years of this noise telling him how finances work. The less you know, the less hard it is, and that might sound silly. But because we know finance this way, that’s all we can think about.

I met with some clients this week, and she said to me, “Mary Jo, what if it all falls apart?” And in particular, she was talking about the cattle market. She goes, “What if the cattle market just collapses? I don’t want to have the debt.” And they did have some loans on some stuff. She goes, “I don’t want to have the debt, because this is what happened to our family when cattle prices dropped,” whatever. I don’t know the details. She just said this is what happened to her family. And I said, “If cattle prices drop…” And you’re telling me the whole market falls apart. Your cows aren’t worth anything, your trailers aren’t worth anything, your squeeze chute’s not worth anything, because who’s going to buy it? So because you are buying all these things and you have them paid off, you think, “Well, good, I have assets.”

But your assets are all inside of an industry that fell apart. Those assets aren’t going to be worth what they’re worth today. So that’s great that you’re debt-free, but why are we not putting money through a policy, so that if the cattle market falls apart, that money is earning uninterrupted compound interest and dividends? You could have an extra 10, 20, 100 million dollars, depending on what we’re going to put through a policy. So you could have that money working for you, which you then have access to borrow against, or you could use cash and pay all of this off and be debt-free. Putting it through the policy first gives us access to cash. It gives us flexibility to pay it back when we want. We have 100% control. It gives us death benefit as collateral to the loan. Our heirs will still get a death benefit, minus whatever the loan is. It is a better use of our money to run it through that way and then borrow against it and pay it back.

I hope that helped. I don’t know that that helped, but I hope that helped, because I have this question over and over and over. And if that didn’t help, and you have ideas of how I could explain it, I’m game. I’m game. I came home and used Monopoly money. When I heard about the concept, I actually sat down with Monopoly money and started moving money around, because it just didn’t seem like it should work. Like, all we’re doing is moving money. Why does that make any difference? Because where we’re putting the money in the meantime, where we’re housing the money, is earning us uninterrupted compound interest and dividends, and so that’s making sense. So if there’s a better way for me to explain it and you still didn’t get it, let me know. You know, email me.

Speaking of emails, I got a fun one today. I lied. Just so you all know, I lied in the book about 529 plans, because apparently there’s a 529 plan that you can get that locks in a tuition rate. I don’t know what that 529 plan is yet, but I’m gonna find out, because if people can do that, that’s awesome. I’ve never seen one like that. And so, but I lied. I don’t know a 529 plan that works that way. And I lied about how life insurance works: “There’s no way you can get access to cash this fast. There’s no way.” So I’m a liar, so I lost this guy. I’m sad. Hmm. Breaks my heart a little bit. Arrival syndrome at its finest.

He called six life insurance companies and asked them if they can do a policy like what’s in the book, apparently, and they cannot. So I’m a liar, because six people said that you can’t do that. Even though he could have called 100 IBC practitioners and found out that, yes, in fact, what Mary Jo was talking about in the book is actually factual. Nope. He called six people, which also is enlightening, because that means all of you out there calling your local agents trying to figure out how to do this, and they don’t know, that’s why. It’s no different than the CPA not knowing how life insurance works, because he’s never been taught. I got a lot of work to do. You know, I’m only helping basically one person at a time, ’cause I don’t have group meetings. So a lot of work, a lot of work to do.

All right, you guys, you know the routine. Grab the book, read it, schedule your appointment with John or I, and then we’re happy to help. You have a fantastic rest of your day.