Outside of life insurance, I trade options in the stock market. An option is a contract that gives the buyer the right to buy or sell 100 shares of a stock at a set price by a set date. In 2020 and into 2021, I was trading them to speculate, and it was working. I grew a $25,000 account to about $150,000 in a few months. Then I made a mistake that cost me all of it.
This was early 2021, right after GameStop's famous run-up. The stock had come back down from its highs and was trading sideways. My account was big enough for portfolio margin, which means a type of margin account that asks you to put up less of your own money as collateral. A margin loan means money your broker lends you against the stocks and cash in your account. With portfolio margin, I could sell call options without owning the shares, which is called selling naked calls. I sold calls that would only cost me money if the stock climbed past $100, $175, or $300 by that Friday, and most of them were at the two higher prices. Each one tied up only about $1,000 of margin, so I sold a few, and then a few more.
The stock started climbing late that afternoon, and after the market closed, it spiked toward $175. My margin requirement, meaning the collateral the broker says you have to keep, went from about $4,000 to more than $300,000. My whole account held about $150,000. You can't trade options while the market's closed, so I couldn't buy the calls back or roll them to a later date. I called the broker that night and was told to call back in the morning. In the morning, I sat on hold for almost an hour. When the market opened, they started selling everything I owned to cover the margin. By the time I reached someone on the trade desk, the whole account was gone, and they sent me a bill for about $30,000 on top of that. We eventually settled for less. The lawyers I talked to all said the same thing: you agree to all of it when you use margin.
On the options side, the lesson is to never take a position where the loss has no cap. On the borrowing side, the lesson is that a margin loan is a loan where the lender can change the terms after the fact and sell your collateral without waiting for you. I told the whole story on a LIFE Pod episode where Carlo Viqueira and I traded our worst money stories. What kept that year from wrecking my family's finances was that a lot of our savings sat in cash value life insurance, where no broker could touch it.
A policy loan works differently. When you borrow against a whole life or IUL policy, the insurance company lends you money and holds your cash value as collateral. There's no margin call. There's no payment schedule, and the carrier doesn't sell anything to cover the loan when markets move. Whole life cash value doesn't drop when the stock market does. An IUL, short for indexed universal life, credits zero instead of a loss when its index has a bad year, though the policy's charges still come out every month. Why a policy loan needs no credit check covers the rest of how it works.
A policy loan does have a limit, and it's slower and more forgiving. Interest accrues on the loan, and if you don't pay it, it gets added to the balance. If the loan plus interest ever catches up to the cash value, the policy is at risk of lapsing, which can create a tax bill on the gain. But that plays out over years, with notices from the carrier and a grace period to add money, and you can watch it coming on every annual statement. A policy loan also reduces your cash value and death benefit while it's outstanding. Why you can't borrow 100% of your cash value explains the cushion carriers leave.
If you borrow against anything, whether it's a brokerage account, a house, or a policy, find the part of the agreement that says what the lender can do when your collateral drops, and read it before you borrow.