Posts Tagged ‘infinite banking’

Why Buy Paid-Up Additions?

Tuesday, April 13th, 2010

j0442286 150x150 Why Buy Paid Up Additions?People often ask me what paid up additions are. When structuring our policies we usually place a large amount of each premium towards the purchase of level paid up additions. These premiums are in addition to the base premium. Why do we do this? What’s the benefit to the policyholder?

Paid up additions are small blocks of paid up death benefit. It’s life insurance that you own free and clear. The additional premiums that are used to buy the LPUA’s also increase the guaranteed cash values because the bulk of the earnings premium, less a small up-front expense, becomes immediate cash value. These values are available for your use right away. Another benefit of level paid up additions is that they are dividend eligible. This means that the more LPUA’s you buy, the greater the potential dividend.

By purchasing LPUA’s we are creating a system for annual cash growth within the policy. The paid up additions buy more death benefit and cash value which increase the dividends. The dividends go towards buying more LPUA’s the following year and the cycle repeats. This system helps streamline the growth of the policy values for years to come.

This is especially important for those who subscribe to the infinite banking concept. By gearing the policy towards maximum cash values and maximum cash accumulation we can front load the cash that’s immediately available for your use.

To find out if your policy is properly structured to maximize cash values and cash accumulation, call me or email me. (775) 781-5464 or Scott@TheBankingSecret.com

Scott Storace

Tags: cash value, infinite banking, life insurance, whole life
Posted in Infinite Banking System, Whole Life Insurance | No Comments »

The Great Insurance Debate: Term or Permanent?

Sunday, March 7th, 2010

Debate The Great Insurance Debate: Term or Permanent?A debate has been raging in the insurance industry since 1977 when Arthur L. Williams Jr., founder of Primerica, mass marketed the concept of “Buy Term and Invest the Difference.” This concept took off like a wildfire and put the proponents of permanent life insurance on their heels. Both sides have been slinging the mud ever since.

Personally, I think both concepts have their merits. If you follow this blog or have been through my website you’ll clearly see that I’m a proponent of a niche within the permanent life insurance industry that is referred to as The Infinite Banking Concept. I’m a big believer in the concept and won’t take your time to re-hash why. See previous blogs. However, I will note that I have never believed that one product or concept fits all. I will use this blog to share both sides of this ongoing debate.

“Buy Term and Invest the Difference” - The concept is simple. Since term life insurance is so cheap as compared to permanent life insurance, it is suggested that you buy it and invest the difference in higher yielding investments.

Pro’s:

  1. Cheap life insurance protection in case of premature death to protect your family. You can buy enough to make sure that your family’s lifestyle does not change when your income is suddenly stripped away., without breaking the bank.            
  2. The securities markets have returned an average of approximately 10% going back to the 1950’s. These returns are much stronger than the 4-5% that most permanent life insurance policies will pay. The growth of your invested money should far exceed the growth in cash values within your permanent life insurance policy.

Con’s:

  1. The name term insurance is derived for the period of time that you purchase it for. You buy it for a specific “term” usually 10 – 20 years. This insurance is cheap in your early years and gets progressively expensive as you age.
  2. It is unlikely that this coverage will ever provide a benefit. Penn State University studied term life insurance and publised their results in 1993. Here is what they found:                                                                                                      1.  More than 90% of all policies are terminated or converted.
    2.  45% of all policies are terminated or converted in the first year.
    3.  72% of all policies are terminated or converted within the first 3 years.
    4.  The average duration before termination or conversion is 2 years.
    5.  Less than 1 policy in 10 survives the period for which it was written.
    6.  After 15-20 years exposure, less than 1% of all term life policies are still in force.
    7.  Only 1% of all term insurance resulted in death claims.
  3. Term life insurance only offers one benefit – financial payout upon death.
  4. Investment returns are subject to fluctuation. The level of risk taken will determine the level of growth. The performance risk is transferred to the owner.
  5. Investment returns are typically quoted as gross rates of return. The net rate of return after capital gains taxes and transaction fees have been paid can be considerably lower.
  6. Many people do not have the financial discipline to “invest the difference”. If not automatically invested then the cost difference ends up in lifestyle expenses.

“Permanent Life Insurance” – This type of insurance is permanent and guaranteed. It is considerably more expensive than term life insurance but offers numerous additional benefits, other than a death benefit.

Pro’s:

  1. These policies have a cash accumulation feature. The cash values within the policy can be used as needed.
  2. These policies are guaranteed. The death benefit is guaranteed to be paid and can’t be taken away. If it is a participating policy, the dividends can not be taken away or reduced. Your premiums are guaranteed. They can not increase as you age or your health detioriorates.
  3. Tax deferred growth and tax advantaged distribution. The cash values grow tax-deferred and can come out tax-free via a policy loan.
  4. Dividends received are non-taxable.
  5. These policies offer a guaranteed internal rate of return typically 4-5%. This return is tax advantaged.
  6. Can employ the Infinite Banking Concept of using the cash values to self-finance. This strategy can greatly increase wealth by decreasing wealth transfers through interest, taxes and fees paid to 3rd party financial institutions.
  7. Offers a death benefit, life term life insurance, that will pass income tax-free to the polciy holder’s heirs. Unlike term life, it’s an instant and permanent asset. This asset can be used strategically as a living benefit (more on this next week).
  8. Since the death benefit and premiums are guaranteed it can be used in a number of strategic tax, business, investing and estate planning applications.

Con’s

  1. Permanent insurance is much more expensive and it’s not affordable for everyone.
  2. Some families & businesses do not need the level of benefits that are provided.

In review: As is the case whenever multiple products are compared, it boils down to cost versus quality. Both term and permanent insurance are excellent. They fit the needs of different people and groups. Suze Orman and Dave Ramsey should know this. It’s common sense. The distinct differences of each should be thoroughly presented. One size DOES NOT fit all. The needs of each individual must be understood and the proper solution applied to each.

Scott Storace

Tags: cash value, guarantee, infinite banking, investing, life insurance, liquidity, safety, tax benefits, tax-free, term insurance, whole life
Posted in Business Planning, Infinite Banking System, Insurance Protection, Investment Planning, Retirement Planning, Whole Life Insurance | No Comments »

Real Estate Investing with the Infinite Banking Concept

Sunday, February 21st, 2010

monopoly 150x150 Real Estate Investing with the Infinite Banking ConceptI 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

Tags: cash value, infinite banking, life insurance, tax benefits, tax-free, whole life
Posted in Financial Advice, Financial Strategy, Infinite Banking System, Insurance Protection, Investment Planning, Retirement Planning, Whole Life Insurance | No Comments »

Business Tax Deductions With Your Whole Life Insurance Plan

Friday, January 29th, 2010

Deduction Business Tax Deductions With Your Whole Life Insurance PlanI was recently asked by a reader of this blog to explain how an S-Corp can get a tax deduction for purchasing a vehicle with funds from a whole life insurance plan.

Let me start by saying that I am not a licensed CPA or tax preparer. As always, for thorough tax information regarding your unique situation it’s best to consult your tax professional. In answering this question I will also eliminate its S-Corp specific nature and instead refer to it as a business. I am not qualified to speak about the tax subtleties regarding the various entity structures. The information that I will share with you below does come from certified public accountants. I have information from 3 separate CPA’s that supports the information below based on today’s Internal Revenue tax code.

First, let’s review what the IRS allows a business to deduct. There are 3 important IRC sections to review.

  1. IRC Section 162 tells us that ordinary and necessary expenses incurred during the taxable year in carrying on trade or business can be deducted.
  2. IRC Section 163(h) tells us that, other than 7 exceptions, no personal interest is tax deductible. Trade or business is one of the exceptions.
  3. IRC Section 264(d)(4) tells us that policy loan interest is deductible for business purposes.

In claiming a tax deduction you will need to verify that the expense is indeed for a legitimate business use. If you are the lucky recipient of an IRS audit how will you prove this? The answer is: DOCUMENTATION. You will need to establish a paper trail. If you can’t prove it, it did not happen!!! Since every transaction can be different I won’t go into the detail of what documents are required. Your tax professional can assist with that.

Now let’s dive into the details.

  1. We first start with the whole life insurance. Since there has to be an insured life, we will assume that the business owner is the insured as well as the policy owner. The business owner will take out a policy loan and lend it to the business.
  2. The business will use the funds to purchase a vehicle. Again the vehicle must be used in the conduct of business in order to receive the deduction.
  3. The business will make regular payments to the policyowner based on the terms of the promissory note.
  4. The business owner will make regular payments back to his policy based on the terms of the policy loan.
  5. At the end of the year the business willl have paid interest on the loan to the policyowner. The business, in this case an S-Corp, will claim this expense on form 1120S. The policyowner will have received investment income. The business owner will claim this income on Schedule A of his 1040. The interest expense and the interest income ultimately cancel each other out. In the end the net tax deduction comes from the interest that gets paid to the insurance company for the policy loan.

Let me summarize this business banking transaction. The business has purchased a vehicle with financing from the owner’s life insurance company. The principal and interest for this loan go back to the business owners whole life insurance policy. He has become his own banker and financed the car for his business. The owner receives the interest income and the tax advantaged growth of his policy. The business gets a vehicle and a tax deduction for the interest expense paid to the life insurance company.

This scenario can play out in a number of ways. That’s why it really is the Infinite Banking Concept. Whether for personal or business, policy loans can be used to serve an infinite number of needs. Go to my website and see some of the ideas we’ve posted under Banking for Businesses.

Keep the questions and scenarios coming!! If there is ever a question that I don’t have the answer to you can be sure that I will do my best to find it.

Scott Storace

I am blessed to receive an abundance of referrals from satisfied clients but I will always welcome more! So send your friends and family my way. I’ll be sure to treat them right. You have my word on that.

Tags: cash value, infinite banking, tax benefits, whole life
Posted in Business Planning, Financial Strategy, Infinite Banking System, Whole Life Insurance | 2 Comments »

Bob the Baker or Bob the Banker? -The Infinite Banking Concept In Action

Sunday, January 17th, 2010
 
Baker 150x150 Bob the Baker or Bob the Banker? The Infinite Banking Concept In Action
“Bob the Baker” or “Bob the Banker?”

I want to illustrate the power of the banking concept as compared to traditional financing. Let’s assume Bob The Baker wants a $25,000 loan to buy a new oven. His local bank offers him the $25,000 at a rate of 10% for 7 years. Bob agrees to this and the following month begins making payments of $415.03. He makes these principal and interest payments monthly for the next 7 years. When the term of his loan is completed, what is he left with? Well he now owns the oven outright. But he has transferred every penny to the bank. This is money he can’t get back. For the opportunity of borrowing, he has paid interest to the bank of $9,862.47 in addition to his principal loan of $25,000. Therefore, he has shelled out a grand total of $34,862.47.

How would this change if Bob had properly funded a whole life insurance policy for use as his own banking system? Let’s look. To start we need to know a little more about Bob. He is 45 years old, in good health and living in California. He is considered a standard/non-smoker when being rated by the insurance company. These assumptions allow us to determine the characteristics of his policy. Now that we have done so, let’s make the same assumption that Bob will borrow $25,000 from his policy, or personal banking system, and pay himself back at the rate of 10% over the next 7 years. What happens? The payments are still the same amount of $415.03, but instead of taking 84 months to pay back the loan it only takes 68 months. That shaves off 16 monthly payments, saving Bob $6,640!

Now what is Bob left with and who has Bob’s money? He does! He paid himself back the $25,000 in principal along with $3,252 in interest. He has all the money that he would have spent but rather than transferring it to the local bank he has put it back into his pocket. He has effectively earned a 26.56%+ rat eof return for himself without taking any additional risk.

Where can you find a 26.56% rate of return today with minimal risk? In addition, every payment that he makes back to himself is available to be used immediately. He can get multiple turns of the same money…just like a bank does.

There are many variables which will make each scenario different from the next. As you can see though, by changing HOW you finance instead of WHAT you finance you can reap significant financial benefits.

Scott Storace

Tags: infinite banking, whole life
Posted in Business Planning, Financial Strategy, Infinite Banking System, Investment Planning, Whole Life Insurance | 2 Comments »

Whole Life Insurance Provides a Banking Factor

Tuesday, November 24th, 2009

A great reason to have whole life insurance in your plan is the banking factor. Whole life insurance policies have a cash value account and a policy loan feature. There are no stipulations regarding the use of a policy’s cash values. You don’t have to qualify to use your own funds. No one will ask what you are using them for. You have full liquidity, use and control of the cash values in your policy. In fact, the policyholder has the first right to the cash values. By taking a policy loan from yourself, you are able to use the funds as you see fit in your personal life and business. Whole life insurance policies do not have self-dealing laws like IRA’s.


When we use these policies for banking purposes we actually promote and endorse self-dealing. Why? By borrowing from yourself and paying yourself back in lieu of borrowing from a traditional bank, we become the banker. We control the terms of the loan. More importantly, instead of paying interest to the bank, we recapture that interest and pay it back to ourselves. The money that flows out to pay your loans is getting paid back to you. It’s like pulling it from your left pocket and placing it in your right. As your policy, or personal bank, grows you can begin to self-finance virtually anything. The opportunities are infinite. Since whole life insurance policies are structured differently than bank loans, the principal is reduced quicker when comparing the same loan terms. A loan that gets paid off quicker means that less payments are made. When less payments are made more money is saved. As the banking cycle is repeated within a whole life insurance policy, the cash values, dividends and death benefit all grow. Therefore, this feature has become the focus of my clients.

Scott Storace


Tags: cash value, infinite banking, whole life
Posted in Infinite Banking System | 3 Comments »