Using a high cash value Life-Insurance policy really as a bank
specifically here we are focusing on dividend paying all life insurance and
maximizing the cash value component of policies, but this idea
using a life insurance policy as a bank or practicing the banking function is
quite popular. There's a lot of different names out. There it really it all comes from Nelson Mantley infinite banking concept
he's the guy that started it and branded it
and then we see a million other names out there that pretty much do the same thing
maybe they've their own spin on it whether it's cash flow banking Bank on yourself
there's a lot of different names but what it all revolves around is the idea of using a dividend paying
whole Life Insurance policy as a financing tool
so how does it work like a bank right if we're going to practice the banking function or just park money there?
How does it work?
well
there's really two components, you know individuals we work with typically fall in one of these categories
and sometimes it's both we have the cash value asset itself and then we have the banking function
so to start with a cash value asset a Life Insurance policy at its core if we structured right
optimize the cash value of the policy. It is a safe secure liquid
tax-free area to position money with strong guarantees. I didn't mention tax-free the policies got to be set up right to ensure
we don't trigger a taxable event there. But if it's all set up, right, we've got a tax-free benefit
We have a guaranteed floor often a 4%
very liquid meaning we can access the money and then we have these safety as well
so the money is never never tied to or invested in the stock market
you'll see no matter what happens ones cash value continues to appreciate over time. Okay
then we've got the banking function and this really teaches one or or
revolves around the idea of using a whole Life Insurance policy really is a financing tool
so the idea here
fine
with the cash value and life insurance policy instead of going to a lender instead of an institution
we're taking control of this banking function and using it ourselves
our money stays at work for us what that means is once a dollar passes through the cash value of a whole life insurance policy
regardless if we just let that dollars didn't grow or if we borrow against it if we pull the money out it
continues to stay and work for us. We're going to see an example here. Excuse me, and
then really with that we can use the policy for purchases whether that is real estate
paying off debt if I'm investing in my business, whatever it might be
so let's touch on this piece first because what I'll often talk about is hey
how do I optimize the cash value first because if I've got more money and equity in the policy short term and long term that
gives me more money to work with than to practice this in turn. That's really what I'm after
so nice spreadsheet here to put a lot of returns and such because I love that stuff
so what we've got here is a policy on a 35 year old male
funding for a short period of time now what I'll say with a whole life insurance policy is you can
design a policy where you can literally pay into it your whole life
however
we're gonna stop here in five years
I like demonstrating that for the reason that a lot of times people hear the word whole Life Insurance
and they think I got pay my whole life and then we see wait a minute I can fund for a short period of time
and keep going if I wanted to but I'm not required to do so, it's a neat concept when we look at it
well here what I want to touch on so the cash value asset itself
so what we ran here is one product with one company on this 35 year old male but different
crediting rate assumptions. The first thing on the Left we have is the worst case scenario
guaranteed values gross crediting rate of 4% a time. You see a guaranteed rate or a dividend for that with any insurance company
always keep in mind that is a grocery that is credited after
the insurance company's expenses and mortality charges
so we see the attached value accumulation I pay in fifty first year. I've got just about 45
by here five
I've broken even again based of the guarantees here, I think nothing in
cash value continues to accumulate. Okay, that's great
then I've got my annual
IRR which represents internal rate of return and then my average IRR
now this average is a little
overinflated it's going to top out about 2.5 2.6
the reason being has to do with the insurance product it use the guaranteed rate, but it use the current term insurance of expenses
where we made this worst case scenario. I'm getting for too much detail if you have questions on that reach out, okay?
All right. So let's keep going here. So annual IRR and average the annual
represents what I am earning year over year so that particular year if I'm going to say hey I earned
8% in the market this year or the S&P in 2019. S&P 500 did just about 30 percent
well if I'm going to look at a specific year
you can do the same thing with a policy or any asset for that matter
so this show is based off the worst case scenario guarantees
the policy tops out little over three and a quarter three point three four at a tight year over year
now the average will be lower
because that's going to factor in really the first year the early years where I'm negative
so the annual is gonna pull it up
but overall
0.8%
when the average based up the guarantees
no, we're that's so interesting to me is a lot of times we hear reviews
about whole Life Insurance where does 1% of best
This does demonstrate the structure and the design of the policy. Yes
this shows 50 grand on it per year
but this would be the same if they paid in 10 grand per year if the structure if the design is
consistent so
might say okay 2.8 percent or even three and a 3.3 overtime
isn't that great two things on that it is a tax-free yield
we're going to look at it comparison to taxable next and also we are assuming
absolute worst case scenario with the guarantees
where we've always seen it do better than that
then we have a conservative dividend rate for point eight two five
then we have a dividend a five six five and then we also have with this whole life product and indexed feature where we can
index the dividend you switch back and forth between the basic dividend and the index
some people like it some people don't
if anyone attaches it we usually put it to zero which is the exact same thing as if you didn't have it and then you
can flip it on on years that maybe the market tanked or something like that, but what you'll find here
so this again is touching on the cash value asset
so if we go back to the whiteboard here, we're focusing on this piece
right here
safe, secure
look for the guarantees
liquid we're going to look at that a minute and tied to this piece and
the tax advantages don't look at that -
all right
go back to our Spreadsheet. So again, this is just showing ways to optimize the cash growth again
the more equity we have more money we have access to use
take a look at this
so, you know kind of on this point the idea of using it
like a bank or so we talk to individuals and they say, you know
I like this idea of a Life Insurance policy because it's kind of a thing
I can put money in there and have it actually earn some interest
for me in still have access to it, which is true
I mean frankly a bank account even really look at the guarantees is not going to give you
three point three percent year-over-year
now what we've got here are taxable equivalence
okay taxable equivalent what this means is we ran here a twenty percent tax bracket
meaning if the individual was in a twenty percent tax bracket
what would he have to earn to get the same tax-free equivalent in the life insurance product?
so
for example, we looked at the
worst case scenario guarantee values and then the opposite end of the spectrum
with the best case scenario that's indexed features
that way we're going to try and cram them all on one page
so if I look at
so if by the time he's on the annual IRR, it doesn't really matter
three point three four percent is what he earned on the guarantee values
he would need an attack sizable investment based off of a twenty eight percent tax bracket to earn four point six four percent
meaning a four point six four percent yield after tax nets out to that three point three and change
same thing with the averages here
now when you look at the stronger yields
it's all relative tops out a little over five percent
which would require
between six and seven percent over seven percent
annually and then six percent via the average. Can you do better possibly? And I mean, I would never
suggest one
look at a whole Life Insurance policy instead of another investment strategy or instead as
a
property purchase or putting money in the market. Whatever. Our thing is. I always look at it as how do I enhance my
present situation with this by park money or have money just in in cash or something like that
great alternative in that respect
so amazed taxable equivalents here
let's take a look at using the money
so again now we're going to look at the making function more so so money stays at work for you, right?
I want to use it as a financing tool here
there we go
unique feature to a policy
we saw those that growth over time the returns based off the different assumptions
once that money's in the policy
regardless if you let it stay there and grow or view loan against if you borrow against it, you'll continue to receive
compounding on the entire bucket of money a
lot like real estate right if you own a home free cleared or if you have a mortgage acts out against it if it's a
appreciating the appraisal value at 5% you're gonna get that in the entire home
regardless if you own it outright or not
so money continues to stay at work for us and let's use it for some purchases or we're gonna buy
for 200 grand you wanna buy
let's say we buy a piece of property or reinvest in our business
we clear some student loans, maybe lose from med school or something like that. So how do the loans work?
I'm using it as a financing tool. This is based off of the basic dividend rate
so one of the mill they wrote assumptions here, you see the annual an average IRR's
that is that tax-free yield. We did not put
the taxable equivalents on this sheet, but
here we go. I pulled on
$200,000. What is the impact of that?
$200,000 coming out of my policy your cash value is your equity. So look at this
70,000 in cash compare that to the example where I just paid money and let it sit and grow
what do I see just about a 200k reduction so the cash value again? That's that equity degage
that that determines how much I can pull from the policy now
the nice part is is the company is going to continue
to pay dividends on any money in cash value and the money we want we are
how and why they do that because this question comes up quite a bit. Why would an insurance company do that one?
they do charge interest on the loan. Just like if I borrow if I think I'm mortgage out with a bank
they're only to charge me interest on it and then to the source of collateral is
the death benefit
we borrowed
$200,000. How much did you death benefit drop their?
Dollar-for-dollar
$200,000 so
really what the insurance company collateralizes is the death benefit remember as a life insurance company
what is their first and foremost obligation?
Pay Life Insurance claims if we die with a loan outstanding, that means they're on the hook for that much less
Okay. So here we
borrowed at that 200 K and in this example
what we Illustrated here was repaying
the loan interest every year and started attacking the principal
the year after we took a loan. So the first year made no, principal payments interest only in reality
when we take a loan from a policy, we have complete control whether we sporadically pay down
never pay it down provided the policy doesn't lapse a lot of times during retirement
people will take income through loans and not paying back tons of control
but here we are going to repay because I want to illustrate how the policy functions here is low interest payments
there's the interest when we pull that 200k loan out, we hate that out of pocket well the interest loan interest payment
following year we paid the interest again, but the balance as well
and like blue we've got our total out-of-pocket
so obviously as we throw
20 grand per year at the principle of the loan or chipping away at the balance
is your loan balance as a result less interest accrues naturally. Here's the main thing to look at when your cash value
I'm sorry when your when that loan is paid off?
You notice here
the cash signing death benefit a little bit stronger on the bar on repay example that has to do with the direct recognition treatment
they credited us a higher dividend on borrow funds not going to get a whole lot into detail on that point being is
we took that 200k out perhaps we used it to
invest in property yet or in our business. Maybe that was producing eight percent
it was our business. Maybe it produced 80 percent
our business is usually a passed rate of return point being when he stayed at work for here in here kept on
compounding while at the same time who leveraged it to yield the rate of return elsewhere
Yes
we did have the loan interest expense as well
always good to disclose that we could take this several steps further and see how much am I actually earning on my business my investment
debt pay down whatever it might be to crunch the real numbers. That stuff is fun
but overall this is a nice way we can use it as a financing tool
so nice alternative to having money
in a bank now, we should definitely still keep money in the bank some of it the emergency fund fund we do have
access to money it's very liquid here. We can get to it any time when we request a loan
typically, we get this anywhere between two and maybe five to seven business days call it two to seven business days depends on the company
and if it's ACH that's direct deposit or if they mail a check o with that said
some insurance companies when you actually read the contract language
which is fun to do
can
hold a loan request for up to six months. I've never seen that happen
even when we look at
policies that live the test of time through
serious economic turmoil the depression has that happen?
I haven't seen it happen, but contractually they reserve the right to do so in 2008 didn't happen either
but it's good to be aware of that. So why I mention that is I want that everything here
I do want to keep money in that short-term cash reserve rainy day happens
I'm good in that respect. But anyway, hope this helped got it from a concept standpoint
no, we blended the life insurance in there as well to
have it questions reach at like some custom proposal as our policies reach out, and I hope this helped. We'll talk to you. soon
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