|
||||||||||||||||||||||||||||||||||||||||||
I came across this NBC News video this week and thought it would be good to share. A word of caution: If you believe that Dave Ramsey and Suze Orman are financial gods and hang on their every word then I advise you to close your web browser.
If you feel that the generic advice they dispense is more appropriate for people who get their financial plan from watching their TV shows and having their investments handled by multi-level marketing company Primerica then watch this.
Scott Storace
I thought I would give an actual scenario this week of how the Infinite Banking Concept is being put to use every day. Like the game, it can become a monopoly!
Assumptions: We have established a whole life policy that’s properly designed for the Infinite Banking Concept. Available cash value for policy loans is $60,000.00.
Scenario: You begin investing in real estate by purchasing a $20,000 rental property. Rent is $750/month. After taxes, insurance and property management you net $500/month or $6,000/year. That’s a 33% annual cash on cash return. You send that $500/month back to your policy to repay the policy loan. So, what do you have? A rental property that you own free and clear with a $500 monthly stream of income back to your policy, and $40,000.00 in your policy.
You use the remaining $40,000.00 in your policy to purchase 2 more properties just like the first. Now you have 3 rental properties that you own outright and positive passive cash flow of $1500 each month.
With a traditional mortgage of $20,000, payments of $500/month and an interest rate of 8% it would take the borrower 47 months to repay the loan. Does the borrower have instant access to their equity? No. They would have to refinance the property, adjust the rate and terms and pay the expenses to do so.
However, one of the best features of the Infinite Banking Concept is the ability to get multiple turns of the money. You don’t have to refinance your loans in order to access the money again. Every time you make a payment back to your policy, those funds get credited to the account and are available to be borrowed again. No questions are asked and no fees are charged. Can you do that with a traditional loan? No. There will come a time when your debt-to-income ratios will be too high or the number of financed properties will exceed the maximum allowed by traditonal lenders.
By re-paying $1500/month in our scenario it will take just over a year before your policy values are back to $20,000.00. Instead of letting it sit in the policy, you borrow it again and purchase another rental property. Now you have 4 properties that you own free and clear with $2,000/month in passive cash flowing back to your policies. Now it will take less than a year for you to accumulate another $20,000.00.
Can you see what’s happening here? By turning your money over you’re amplifying the speed with which your policy values can regenerate. The cycle can be repeated quicker, cash flow will grow more robust and you will be able to purchase more properties over and over again.
In time, you will have a hefty stream of passive cash-flow that will be pouring into your policy. You will own all of your properties outright, minimizing the risk from market downturns. However, you will still be able to enjoy a tax write off on the mortgage interest from the policy loans. As with any write off the paper trail must be properly documented and meet with the IRS standards.
And by paying off your loans completely, you will maximize the growth of your policy. Your dividends will increase, the death benefit will grow and your cash values will flourish. It’s the snowball effect. So, when it comes time to retire, not only will you have that passive stream of rental property income, but you will also have a nice annual tax-free dividend that you can take from the policy. And when you do pass away your beneficiaries will receive the death benefit income tax-free. Plus, they’ll receive a step-up in basis on those rental properties when they are sold. What’s that? Essentially, there will be no capital gains tax on the sale. The previous basis, or amount spent on the property, will be bumped up to the current value. Net tax is 0%!
I’ve mentioned the living benefits that the Infinite Banking Concept offers. This is a prime example of that. Many people see life insurance as one thing…protection in the event of premature death. But it can be so much more than that and that’s the point I want to drive home. The uses are truly infinite!
Scott Storace
In the spirit of Valentine’s Day, I wanted to talk about life insurance from a different perspective. Most of my blog is spent discussing the financial and living benefits of life insurance. But life insurance is, and will always be, a means of providing for loved ones in the event of death.
If you love someone, you protect them. Life insurance is the ultimate form of protection. Who will take care of your spouse and children if you were to perish? Will they be able to maintain the same standard of living? Will they be forced to move from your home? Will your spouse still be able to send the children to college? Who will pay your final expenses?
If you love someone you would not want to pass this burden onto them. You want to guarantee that the plans you have made and the life that they live will continue. The grief of a significant loss is tough enough to bear without adding a hefty fianncial strain. Life Insurance is the only product that guarantees what you want to have happen…will happen!
In a Prudential Financial Inc. study entitled “Life Insurance: A Guarantee in Uncertain Times” they found that 72% of life insurance owners say that this market downturn has reinforced and deepened concerns about providing for loved ones. 94% of policyholders value the guarantee it provides. Market instability, home equity values slashed and unempl0yment at it’s highest level in 27 years it’s not surprising that people are seeking guarantees to protect and provide for their loved ones. 71% believe products with guarantees are worth the cost and 67% of respondents did not fully appreciate all that could go wrong prior to the market downturn.
So, what product provides these guarantees? Participating whole life insurance. It guarantees:
In addition, there are a host of additional financial and non-financial benefits that whole life insurance provides. When it comes to loving and protecting your family…peace of mind tops the list!
Let’s end with a funny but practical video called “Insure your Love” put on by the LIFE Organization.
Enjoy Valentine’s Day with your loved ones!
Scott Storace
A few weeks ago I wrote about 3-Legged Stools and the pitfalls of UL & VUL policies. This has been a rather hot topic, so I wanted to expand upon it this week.
UL & VUL policies can appear very attractive when illustrated. Whether they offer a guranteed rate of return or not, you must read the policy itself very carefully to check for hazardous provisions. Such provisions may limit access to cash values, eliminate your guarantees or lead to severe financial hardship.
First, let’s talk about guaranteed rates of return on UL & VUL policies. In today’s environment guaranteeing a rate of return with UL & VUL policies may become a trap. Anything with liquidity, use and control over the cash values will not create that rate of return without some offsets somewhere. Here are some to look for.
Surrender Charges and Limited Access to Cash Values: Some UL & VUL plans have long-term surrender charges, such as 20 years. In researching UL & VUL policies, we’ve found a rule of thumb: the lower the internal fees and higher the credited interest rate, the higher the surrender charge and the longer the surrender charge period. Surrender charges place a lien against the cash values and therefore those cash values are not available for policy loans nor can they be used to pay policy premiums. There are a variety of circumstances in life that may prevent someone from paying their premium. Divorce, job loss, reduction in pay, illness, or a death in the family are some of the most prevalent. If you’re unable to pay these premiums it could mean the loss of thousands of dollars of cash value. You want to be able to use your cash values not just have them look good on a policy design illustration. The limitations that steep surrender charges place on UL policies can cause severe damage.
Dividends in the Face of Inflation: UL & VUL policies do not offer dividends. Participating whole life insurance policies do provide a dividend. Dividends are non-taxable income because they are considered to be a return of premium paid. Dividends are calculated and declared at the end of the year based upon the total income and expenses of the insurance company. What happens in an environment of inflation or hyper-inflation which many economists predict we may see? Inflation is terrible for fixed income investments. It directly reduces the yield. A dollar earned today will be worth less tomorrow. That’s inflation. So, earnings from a fixed investment today with limitations on interest rate increases will be worth less when those earnings mature. Dividends are the hedge against inflation. In an inflationary environment, investment yields will increase across the board. The investment earnings that the insurance companygenerates will be greater in a period of inflation as those seeking investment dollars need to offer more in order to attract investment dollars. The increased earnings are passed down to participating whole life policyholders in the form of dividends. Holding a UL or VUL policy offers no such benefit and cash values will be worth less then anticipated.
The Term Insurance Chassis: The chassis of UL & VUL policies is renewable term insurance. The internal term rates automatically increase by contract. It is a slow, annual increase in cost early on until it begins to compound rapidly as the insured ages. The premise of UL & VUL policies is that the cash value and earned interest will offset the increasing cost of the insurance. When that does not happen, as in today’s low interest environment, the cash value will not grow enough to offset future cost increases which are, by contract, guaranteed to occur.
Beyond that, here is the fatal flaw. Internal UL & VUL term costs are based on current and guaranteed rates. Current is simply what the insurance company charges today. The guaranteed rates are printed in the policy and are commonly 2-4 times higher than current. Keep in mind that there are only 3 ways to access the cash values in these policies.
Let’s use this example: The insured takes a policy loan to avoid taxes, without the intention of repaying them. Conditions arise to cause the internal rates to move up to the guaranteed rate, which actually is the higher rate allowed by the contract. The combination of money removed for income and the higher mortality costs stresses the policy to the point that income (loans) and costs exceed earnings. From that “tipping point” the policy will lapse in a surprisingly short period of time. Once the policy lapses the previously unreported loan income becomes reportable, potentially causing a very large tax bill while the policy values vanish. The longer the policyowner lives the greater the risk and the greater the impact.
In effect, while the policy supposedly guarantees an attractive rate of interest it does not guarantee the income and death protection results that the insured wants and needs. Like all UL & VUL plans, it places the risk back onto the client.
When the death benefit is guaranteed, as it is with whole life, it becomes an asset which can be used to leverage guaranteed and tax free income without the risk of it coming back to bite the policy holder.
Scott Storace
|
|
