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The Importance of Building a Proper Succession Plan

In life, everything has a cost. There are the things that we see, but there are also the things that we don’t see. And unfortunately, the cost of the things we don’t see could be significantly greater than the cost of the things that we see.

When it comes to business succession planning, a lot of business owners tend to put it off. They don’t want to pay the cost of getting the planning put in place and funding the plan. But what they don’t see is the cost of that inaction.

 

When it comes to family businesses, there are a lot of dynamics involved. You have spouses, you have children that are involved in the business, you have children that aren’t involved in the business, and it could get a little sticky. So how do you smoothly transition and allow the next generation to step in, gain control of the business while you’re still there and ultimately at your death?

One thing we know for sure. Fair is not equal, and equal is not fair. What do we mean by that?

Let’s assume you have two children, one working in the business and one who is not working in the business. If you leave the business 50/50 to each of your children, that’s not fair to the child who’s working in the business. And ultimately, it’s not going to be fair to the child who’s not working in the business.

The child who’s working in the business wants to grow the business. The child who’s not working in the business wants to take income from the business. Those conflicting goals can cause a lot of strain on the relationship of your children, and it could also put a lot of stress on the business.

If I’m the child who’s working in the business and my sibling is getting half of the profits, what motivation do I have to build the business If I’m only getting half of what I deserve, what I’m earning, and what I’m working towards every single day?

Conversely, the child who’s not working in the business wants to take as much income out of the business as possible, stripping the business of its profits and its ability to reinvest and grow the business.

So how do we solve this issue? How do we make sure that the child who’s not in the business gets properly compensated from her parent’s estate and make sure that the child that’s in the business is able to grow and expand and really profit from what their parent has established for them.

And the answer is with properly documented and properly funded businesses succession planning. You see, business succession planning lays out exactly what you want to have happen at your death, disability or retirement to take care of the child that’s in the business as well as should properly fund the buyout of your other child who’s not involved in the business.

But the problem becomes how do you come up with the funding, the liquid cash to buy out the nonparticipating child? That’s where proper planning comes into play. And there are many ways that you could fund or reward the child who is not participating in the business.

Number one, you could pay cash. Keep it liquid. Take it out of the business. Buy out that child. Number two, you could finance. You could go to the bank finance a loan, and pay it back over time if you don’t have the cash. And the third way is to buy life insurance, insuring that first generation owner so that at their death, liquid cash comes out of the life insurance policy and allows us to buy out that other sibling.

By insuring the first generation owner. Nothing happens until that person dies. And the event that creates the problem, the distribution of the business or the value of the business is also the event that triggers the solution, life Insurance.

If you’re interested in learning more about how to put this process to work for your family business, check out our website at Tier1Capital.com and feel free to schedule your free strategy session today.

If you’d like to learn more about how we put this to work for business owners, check out our free guide for business owners.

And remember, it’s not how much money you make, it’s how much money you keep that really matters.

The Importance of having a Business Succession Plan

Did you know that the number one reason why small family businesses fail is because of lack of planning? Only one third, 34%, of all small businesses have a robust, documented succession plan. One of the main reasons that business owners fail to plan is because they’re too busy working in their business and they don’t take the time to work on their business.

You see, when it comes to family businesses, a lot of times they’re already established by the time the second generation gets there. So they assume it’s going to be there forever, but without the proper planning, that may not be the case.

Proper succession planning is the key to pass the family business from one generation on to the next.

 

I’d like to share an example of a local business that failed to do the planning. The business was in its third generation. The founder of the business never did any succession planning, and when he passed away unexpectedly, all of his ownership passed to his wife, who was not active in the business. He had two sons working diligently in the business, who in fact, were growing the business. And he had a daughter who was not involved in the business at all.

The mom never got around to doing any proper planning as well. And when she died, the boys had to pay over $8 million in federal estate taxes in order to gain ownership of the business. Now, as bad as that sounds, additionally, they had to come up with another $3 million to buy out the sister’s share in the business.

They borrowed $11 million and things were humming along fairly well until the 2008 financial crisis hit, and at that time their business basically evaporated. They had very little sales and certainly no revenue coming in, and ultimately they defaulted on the bank loans. The business ultimately went bankrupt. And not only did the two brothers lose their livelihood, but they had 150 employees who also lost their livelihood.

This perfectly underscores the importance of proper succession planning. A business succession plan is there to lay out exactly what’s going to happen when. Whether the owner dies, becomes disabled, or simply wants to retire. It’s a way to pass the business down from one generation to the next and make sure it’s a smooth transition.

A properly documented business succession plan is known as a business owner’s will. It literally addresses the transfer of the business and the business assets.

If you’re at the point in your business where you’re starting to think about how to exit the business and what’s going to happen and what you want to have happen at your death or disability, and you’d like to start with a business succession plan, be sure to visit our website at tier1capital.com to schedule your free strategy session today. We’d be happy to guide you.

Or if you’d like to learn more about how to smoothly make this transition for your business and your family. Check out our Free Business Owners Guide on our website.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

Avoid Cash Flow Issues for Your Growing Business

Everybody knows that cash flow is the lifeblood to any business. But many businesses have chronic and cyclical cash flow issues that inhibit their ability to grow. In fact, 80 to 90% of businesses have most of their wealth tied up within their business.

Within a small business, there are two main factors that could cause these chronic and cyclical cash flow issues. Number one is reinvesting all of your profits back into your business. When you do this, you have little to no access to cash because you’re constantly trying to grow and expand your business, which makes sense because that directly impacts your income. And number two is paying off debt as quickly as possible.

A lot of times business owners are in a race to get out of debt, and so they have a ton of money going every single month, to entities outside of their control. But what happens with this is when they need money again they haven’t built any up for themselves, so they’re forced to go back and borrow the next time something comes up.

That’s why we always say it’s not what you buy, it’s how you pay for it that matters. And when you look at purchases through the lens of you being in control of your money and your cash flow, your decision becomes much, much more clear.

You see, what they don’t tell us is that every single purchase we make is financed, whether we pay cash and give up interest or finance and pay interest. You’re either going to pay up or give up. There are no other choices. This is exactly why it’s so important to be strategic with how you’re using your money.

 

You see, when it comes to golfing, it’s easy. There are only two ways you can improve. You could either buy the best clubs and hope that you have the best golf game ever, or you could practice and work on your swing. We work on the swing in the sense that we focus on the process and how you’re using your money instead of where your money is parked. And that is the difference between us and other advisors. Most other advisors are looking to manage your assets, while we are focused on showing you strategies to increase your cash flow by working on how you’re using your money.

And when it comes to business owners, a lot of times, like we said, their assets are tied up in their business, so it can feel difficult for them to get financial advice on how to maximize their assets and grow their business because their financial advisors are simply there to manage the money. Another thing we see with business owners is that they get their financial advice from their accountants. They have a good relationship with their accountants. They’re there every year. Maybe they have their books done by the accountants, but with accountants they’re looking through the lens of, how can I save my client taxes this year?

Let me give you an example. Your accountant approaches you and says, “Hey, you had a really good year last year, but you’re going to owe the IRS $100,000. However, if you take that $100,000 and put it into a retirement account, it’ll reduce your taxes by $40,000.”

Well, that sounds great. You certainly would rather pay 60,000 in taxes instead of 100,000 in taxes. But what they don’t tell you or what you don’t maybe realize is that you have to take the whole hundred thousand invest it in a retirement account. So now you don’t have use or control of that 100,000. Now you got to come up with another 60,000 on top of that in order to pay the IRS. Are you in a much better position or are you in a more illiquid position as a result of that advice?

This is why we always look at things through the lens of control. Sure, there are tax benefits associated with the methods that we use, but when we look at things through the lens of control, is this going to leave you in more control of your cash flow or a less control of your cash flow? Are you going to have access to this money in the near future or are you going to have to wait 15, 20, 30 years to access that money penalty free? Everything becomes much more clear.

It’s our goal to help as many people as possible to make the best financial decisions possible. We do that by looking at things through the lens of how can we help you be in more control of your money? You see, when you’re in control of your money and your cash flow, you’re in a much better position to address your short term, intermediate and long term goals and objectives, whether it’s from a business perspective or on a personal basis. Our mentor, Nelson Nash, used to say when you have access to money, opportunities will find you.

If you’d like to learn more about how to put these strategies to work for you and your business, be sure to visit our website at Tier1Capital.com and schedule your free strategy session today. We’d love to chat with you, or if you’d like to learn about how we put this process to work for business owners, check out our free guide for business owners right on our website.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

Escaping from Credit Card Debt

Credit cards could be a great financial tool if used properly. They give you instant access to capital and if you pay them off before the credit card due date, you don’t have to pay any interest. Unfortunately, some people get into a situation where they’re carrying a small or large amount of credit card debt that could really weigh down their ability to succeed financially.

Additionally, participating in a tax qualified retirement plan like a 401k or an IRA is a good idea as well. However, what happens when you combine having credit card debt with your participation in a tax qualified retirement plan?

Sometimes people come to us and say, Where do I get started? Do I pay off my credit card debt? Or my student loans? Or do I start saving first? And to that question, we answer, “What if you could do both?”

Credit card interest rates could go anywhere from 18 to 30% these days with an interest that high carrying any credit card balance could become stifling because of the amount of interest being charged each and every single month.

When you combine high interest rate credit card balances with your participation in a retirement plan such as a 401k, that creates a double whammy where you’re saving money in an area that you can’t access. And along the way, you’re paying a hefty interest rate just to get out of debt.

A lot of times people who are carrying a credit card balance and contributing to their retirement plan can feel stuck and suffocated financially because they have no access to cash flow. Hundreds of dollars every month are going towards credit card interest, and hundreds of dollars a month are going towards an area where they don’t have access to that money.

So where does that leave them as far as their short term financial goals? The strategy of where you’re saving your money and the strategy of how you’re using your money need to be coordinated to give you the best results.

Typically, if someone comes into our office and says, “Hey, I’m carrying this heavy credit card balance and I’m contributing to my retirement plan every paycheck”, the advice we might give them is to pause on the retirement until we could get a hold and a handle on this credit card debt, because, like I said, that interest rate can be stifling on your ability to save for your future.

And a lot of times when we see people in that situation, we’ll ask them, how long have they been doing this? And they’ll look and say, “Well, we’ve been doing this for a long time. It seems like forever.”

Well, that situation keeps perpetuating itself. Because what happens is sometimes you start getting that credit card balance paid down, but then you run into a financial or a medical emergency, and that means you’ve got to put more money on a credit card because you don’t have access to any of your money. Why? Because all of your savings is in your retirement account. Again, try to coordinate, where you’re saving your money and how you’re using your money, can give you tremendous results on the back end.

Every situation is different. A heavy credit card balance for some people may be a few thousand dollars. In some extreme cases we’ve seen people with over $100,000 of consumer debt that they’re carrying each and every single month.

But with great debt and great cash flow comes a great opportunity. With some simple shifts, you may be able to get out from underneath that credit card debt by building your own pool of cash that you have access to to start chipping away at the debts one by one.

The ultimate goal is to put you in control of all of that cash flow that you were using to get out of debt or to pay on your credit card. Imagine the impact it would have if you had control of every single dollar that you’re currently putting toward your credit card debt.

Imagine what goals you’d be able to accomplish, like putting a down payment on the house, starting a new business, paying for your car, or simply retiring one day.

This is a simple concept. If you step back, literally what we’re doing is converting liabilities into assets. Any time you can convert a liability into an asset, you win.

The mechanism of this strategy is redirecting excess debt payments from the credit card company and putting it in a specially designed whole life insurance policy designed for cash accumulation so that you could build a pool of cash that you have access to that you own and control.

As you build up that pool of cash, you’re able to borrow against the cash value within the policy and start knocking away at the credit card debt so that you slowly begin to earn more and more control of your cash flow. As you pay off those credit card debt, you redirect those payments to your policy loan so that you’re building your policy with your premiums as well as the loan repayments, and you’re able to pay off debts quicker and quicker down the line.

There are two huge advantages to this. Usually you’re paying a much lower interest rate to the insurance company. Currently, those rates are about five, five and a half, maybe 6% on the high side versus paying 18 to 25 or 30% on a credit card. So clearly you win there.

A second benefit is that as you’re paying back the policy loan, you get to use that money again to pay off another credit card and therefore have more cash flow redirected back to the policy that you are in control. And slowly but surely, you’ll have all of your debt payments coming into your policy and you own and control the policy. Therefore, again, converting liabilities into assets.

The most important step is the first one. If you’d like to get started and learn more about how we could put this process to work for your specific situation. Visit our website at Tier1Capital.com. Feel free to schedule your free strategy session today. We’d love to talk to you.

Or if you’d like to learn more about exactly how we put this process to work for our clients, check out our free webinar, The Four Steps to Financial Freedom.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

Redirect Your Cash Flow Back to You

A lot of people don’t have the time or the motivation to do a deep dive into their finances. And other times people say to us, “Hey guys, I’m not giving up control of my money in any of these five areas of wealth transfer. How do I get started with saving for my short term, intermediate and ultimately retirement savings goals with this concept?”

We talk about the five areas of wealth transfer where we look to find where people are giving up control of their money unknowingly and unnecessarily. Those five areas are: taxes, how you’re funding your real estate, how you’re funding your retirement, how you’re paying for your children’s college education, and then how you make major capital purchases.

But what if you’re not giving away control of your money in any of those five areas of wealth transfer? Does that mean that your cash flow is already as efficient as possible?

But that may not necessarily be the case.

The fact of the matter is, most of your income is flowing through your system, through your checking account, and going to pay for lifestyle or to be reinvested or to help you grow your business.

 

In many situations, we’ll review how people are using their money and we’ll look at those five areas of wealth transfer and we’ll be able to identify areas that they’re giving up control of their money unknowingly and unnecessarily, and show them how that if they just stop doing that, their circle of wealth will grow. And, if they redirect that same cash flow back to an entity that they own and control, they’ll be able to build a pool of cash that they could access, no questions asked, without having to get permission, in order to expand their business or their personal lifestyle.

In that type of situation, it’s easy for us to identify the leaky holes in your personal economic model or in your bucket, if you will. We’re able to plug those holes and fill up the bucket with money. But if you don’t have any holes in your bucket and instead your bucket doesn’t have a bottom, it’s important to build that foundation and start with what you can afford to put away at this point and then slowly build up that bucket. Keeping that money as efficient as possible so that you’re able to achieve your short term, intermediate and long term financial goals no matter what they may be.

What we have found is that everybody has financial milestones or goals that they need or want to accomplish, and in that case, starting where you are puts you in a better position to make your money more efficient prospectively as you’re going forward, because the more efficient your money could be, the better chance you have of reaching those milestones and more, more importantly, achieving your goals.

A financial goal could be something like paying off your credit cards, your student loans, saving for a down payment on a house, financing a new car, or eventually one day retiring. No matter what your financial goal is, it’s important to start somewhere so that you’re able to build before it’s too late.

You see, with the compound interest curve, there are only two factors to consider, time and consistently putting away money. The sooner you start that compound interest curve, the better your results are going to ultimately be. This goes back to a point earlier, when we say pay yourself first. Again, the whole concept is to make your money more efficient, paying yourself first, make sure that you’re saving or you’re going to be on track to meet those milestones.

The process we use uses a specially designed whole life insurance policies designed for cash accumulation to help our clients achieve their financial goals. With this product, we’re able to design a policy to meet the cash flow needs of each individual client, and every situation is different.

If you’d like to get started with a specially designed whole life insurance policy designed for cash accumulation to help meet your financial goals, be sure to visit our website at Tier1Capital.com to get started today. Feel free to schedule your free strategy session or if you’d like to learn more about exactly how our process works and how to put it to work for your family and your situation, check out our free webinar, The Four Steps to Financial Freedom.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

Generational Turnover in a Family Business

Are you in business with your parents or parent and you’re wondering how you could buy them out when the time comes. That’s a huge issue for the younger generations, like millennials, as their parents approach the retirement age.

In America, it’s not uncommon to be in business with your family members, but what happens when the older generation is ready to phase out into retirement and the younger generation has to step into those shoes? How do you transition from the younger generation being employees to being in control of the business and transitioning the older generation out?

That is the age old question. But also keep in mind there are several issues that need to be addressed. One issue is, what happens if the founding or the older generation dies. That can be a huge financial impact to the business. Literally, all of the knowledge, connections and information goes to the grave with that person.

As is with any issue involving family, it’s not always cut and dry. First, we have the issue of death or retirement or disability of the founding member. But what happens if this founding member simply wants to cut back his hours or retire? How does the younger generation buy them out and compensate them throughout their retirement so they could afford to retire, while also affording to maintain the business and their income?

But keep in mind, the older generation needs to be compensated for all the value they created over their lifetime. Think of it this way, if they weren’t transitioning the business to the younger generation, they would have the opportunity to sell the business off to someone else at fair market value. Why should it be any different because we’re transitioning to a family member.

Now, surely there will be a family discount, but the older generation can hang around and can also be contributing to the growth or the sustainability of the business. And obviously all of that knowledge and those connections aren’t just going away.

So the key all comes down to this with proper legal planning and proper financial planning, you can ensure a smooth transition from one generation to the next. But with these steps become, an additional set of issues. You see, you don’t want to just have an agreement with no funding behind it, and you don’t want to just have funding with no agreement behind it. Having these together gives us a whole separate issue, though, of where are you going to find the money to fund this solution?

And that’s where we can help. We are specially trained to show you how to maximize the efficiency of your money so that you can get $1 to possibly do two or three or four different duties and in the process, make your money more efficient. Quite literally, what we’re able to do is to find money within your current cash flow without having to reduce expenses or without having to increase sales or revenue in order to fund this new plan.

It all comes through the lens of making your money more efficient and leaving you in more control of your cash flow so that you’re able to allocate some of that money to accomplishing your goals of buying your parents out of the business, while still being able to operate the business and grow the business all at the same time.

 

You see, what we found is that some simple shifts in how you’re using your money could make all the difference down the road. We recently worked with a business owner who owns a manufacturing company locally. He wanted to start planning his business exit strategy for about ten or 12 years down the line, and it was determined that the business was worth about two and a half million dollars.

So we started from ground zero, meaning that they had no money saved to fund his exit strategy. Now, also part of the backdrop to this case is his son was involved in the business and his daughter was a schoolteacher and not involved in the business. And he wanted to make sure that if he passed away, she would be compensated in some way, shape or form for his interest in the business. What we needed to do was to determine how much money he needed to put away in order to get that full value of his business. Two and a half million dollars. And it was determined that he needed to put away about $200,000 per year.

So now the question became, where are they going to get the money? He looked at me straight in the eyes and said, “Tim, if I could save $200,000, you better believe I’d have been doing that for a long time. I just can’t understand where we’re going to get the money”. And my response to him was, “What if you already have the money within your current flow? You’re just using your money inefficiently. If I can find the money, would you fund the plan?” He goes, “Sign me up“. And that’s exactly what we did.

We did a deep dive into their financials. We looked at where they were putting their money, how they were using their money, how they were making purchases. And lo and behold, we didn’t find $200,000, we found $240,000 of annual recurring revenue that they could use to fund his exit strategy. And in one fell swoop, we redirected money from an inefficient strategy to a very efficient strategy that was going to fund his exit strategy. But in the process, he got much, much more cash flow relief.

If you’d like to learn more about these strategies and how we could customize a plan to put them to work for your business, be sure to visit our website at Tier1Capital.com to schedule your free strategy session today. Or if you’d like to learn more about exactly how we put this process

to work for our clients, check out our free web course. The Four Steps to Financial Freedom.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

Is My Business Marketable Enough to Retire?

As a business owner, it’s not uncommon to have a majority of your net worth tied up in your business. How do you retire when all of your assets are tied up in the business? What’s your legacy going to look like if your only asset is your business? What happens if your children don’t want any part of the business? This is a situation we see all too often. There are some simple steps you could take to make sure you’re able to retire and not depend on the equity within your business.

Do you realize that over 80% of all businesses are first generation businesses? Meaning that the founder of the business started the business and is still operating and working in the business? Also, less than 30% of all businesses make it to the second generation. So there is a great probability that for whatever reason, your children will not take over the business.

Let’s face it, kids these days have minds of their own. But what does that mean for your retirement? How do you retire if all of your assets are tied up in the business?

There’s an old saying that the benefit of a closely held business is just that, that it’s closely held. And you don’t have to consult a lot of owners or a lot of people when you’re making a decision. The bad part or the downside of a closely held business is that it’s closely held and you’re responsible for everything. So, there has to be a delicate balance between making enough money to operate the business, making enough money to grow the business and making enough money to make sure that you’re independent of the business so that you could leave on your terms.

The fact of the matter is, a lot of small businesses aren’t marketable, and the main reason for this is because the owner is the breadwinner of the business. If the owner was coming with the business, it would be worth a lot more than the business without the owner who’s been running it for however long. So what ends up happening with these small businesses is they’re forced to liquidate any inventory they have and any equipment that they have at fire sale close out rates and walk away, close the doors of the business for a fraction of the price that they would have got had they been able to sell the business as a whole.

So the danger is that you pour all of your profits back into the business by doing so, you’re literally locking up that money inside your business and setting yourself up where you may never be able to get the value of the money you actually put in, let alone a profit.

 

When you first start your business, it’s important to reinvest the profits so you’re able to grow and expand. But as your business matures, it’s even more important to diversify so that you have liquidity use and control of an asset and also have your business to provide income for you and your family.

How do you continue to operate and grow your business while at the same time making sure that your future, or your exit strategy, is independent on having to sell the business?

We recently came across a situation with one of our long time clients who was a business owner for 37 years and he had an offer to sell his business. But because he had over two times the value of the business in other assets, he didn’t have to take the first offer that came along and he was able to wait for the best offer to present itself.

As with any financial planning, taking steps early on to secure your financial future is best. And it’s never too late to start planning. By taking these steps to secure your financial future, you’re setting yourself up for success in retirement and also securing your legacy for your family. You’re not dependent on the sale of the business for your livelihood. Instead, you have a pool of cash that you have access to along the way, and the business to help support your income for you and your family.

This individual took the best offer that was on his terms. By selling his business and getting the best price possible, it was just sort of like frosting on the cake. You see, he wasn’t dependent on the sale of his business for retirement and said he had money set aside, that he had full liquidity use and control that he spent years accumulating so that he wouldn’t have to be dependent on the sale of that business in order to retire.

With cash comes control. And that’s the lens which we look through to make sure that our clients are making the best decisions possible and setting themselves up for growth today and also security in the future.

If you’d like to get started with a plan to secure your financial future for you and your family and your business, be sure to visit our website at Tier1Capital.com. Feel free to schedule a free strategy session. We’d love to chat with you.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

How can You Properly Invest in a Down Market?

Capital investments are vital for any business to keep it growing and operating smoothly. But with interest rates on the rise, the cost of financing could feel quite daunting. How do you continue to grow and expand your business without being bogged down by the costs of new equipment and capital investments?

When you’re making a capital investment in your business. Any way you look at it. You are going to pay a finance cost. And what I mean by that is, if you finance, you’re going to pay interest to the bank or the credit company for the privilege of using their money. But if you pay cash, you are giving up interest that you could have earned on your money. So the question becomes, how can you make that capital investment in your business and still maintain control of your cash?

We always say it’s not what you buy, it’s how you pay for it that really matters. And how could you make your cash flow and your capital as efficient as possible within your business?

When you look at things through the lens of maintaining control of as much cash flow as possible, being as efficient as possible with your cash, now that decisions become much, much more clear. Now what happens is, instead of financing through conventional methods directly with a bank or a credit company, or instead of paying cash, if you maintain a pool of money that you own and control, and you borrow against that money. You fit the amortization schedule to meet your cash flow needs, ultimately it puts you in more and more control of your money while also making that capital investment.

And what we use for our clients is showing them how to use specially designed whole life insurance policies designed for cash accumulation to help finance the purchases within their business. And the reason why we use the specially designed whole life insurance policies is because the clients have complete liquidity use and control over their capital, every step along the way.

With these policies, there’s a loan provision so they have access to the capital on their terms. They could sign a form. It doesn’t hit their credit score and they get to determine the payback schedule of that policy loan. So they’re able to take money from the insurance company and invest it in their business with no questions asked.

So if the lens you’re looking through to make your decision on how to make this purchase is to be in control. You get the purchase, you’re in control of the terms and conditions, and your money is always earning uninterrupted compound interest. That is the same lens that we utilize to help our clients make their money much, much more efficient.

If you’re a business owner and you’re looking to get started with the whole life insurance policy designed for cash accumulation to take your business to the next level, visit our website at Tier1Capital.com and feel free to schedule your free strategy session today. We’d be happy to chat with you.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

What is a Limited Pay Policy?

As a young person, the thought of paying life insurance premiums until age 100 or 121 can seem a bit daunting. I mean, who makes commitments for that long, really? But here’s the secret. There are limited pay policies, policies that are paid for X amount of years. These policies can be a great saving solution for young people.

A limited pay policy could make sense in a lot of situations, but it especially makes sense when you’re dealing with these specially designed whole life insurance policies designed for cash accumulation.

By its nature, a specially designed policy for cash accumulation puts extra money into the policy, and a limited pay policy has extra premium because you’re shrinking down the amount of years in which you’re paying the premium from age 100, let’s say, to age 65 or for a 20 year period or a ten year period.

The lower the amount of years of funding, the higher the premium. But again, if you’re designing a policy for cash accumulation, a limited pay policy makes sense because it puts you in a position where, let’s say a life paid up at age 65, there are no more premiums due after age 65. Now you’re collecting checks instead of paying premiums.

But let’s take a step back. We’re saying a higher premium. And what we mean by that specifically is, it’s a higher premium for the set amount of death benefit, which isn’t necessarily a problem when you’re designing these policies for cash accumulation. You’re focusing on the cash accumulation versus the death benefit. And many people, when they’re young, they don’t have a great need for death benefit. So it’s really not a deal breaker.

But the key is you’ll have the death benefit at your life expectancy when you’ll need the death benefit the most. And consequently, if you have a limited pay policy, again, let’s say a life paid up at age 65, by the time you’re 85, there will have been 20 years where you didn’t have to pay any premiums. But you had a completely paid up death benefit that’s actually growing every year because there’s no cost of insurance dragging the return or the growth of the policy.

In my case, I started limited pay policies years ago and it was a simple way to get started with saving. I put away a 500 or $1,000 a year into these policies, and in ten or 20 years they’re going to be paid up completely and the cash value and the death benefit are going to continue to grow and accumulate interest and dividends throughout my entire life, even after the premiums aren’t being paid anymore.

But keep in mind, there is a trade off with a limited pay policy. And what the trade off is, is that’s less money that you could stuff into the policy for any given death benefit. And what that means is your cash value will be slightly lower in the earlier years, but then you have to weigh the cost of having less cash value in the early years versus the benefit of having no premiums in the later years.

But let’s take another step backwards and think about compounding interest. Compound interest curves require two factors time and money. We all know we could never get time back, and it’s important to consistently put money in to these policies to accumulate the best compound interest curve possible. But with a limited pay policy, you’re limited on how much money you’re able to put in.

So again, in my situation, what I do is I have a term policy that guarantees convertibility of that death benefit, and I could create more whole life policies throughout my life as my budget allows. So as I pay up policies I have the cash flow to now convert a piece of my term policy into a new whole life policy and start the cycle all over again.

But the key is I’ll be building capital that I could access everywhere along the way to take care of the things of life, whether it’s buying a car, whether it’s going on vacation or moving across the country. Not to mention for business opportunities.

 

These policies are great for entrepreneurial type people. You have full liquidity use and control of that money to take advantage of business opportunities that come about. So you could earn an internal rate of return within the policy and also an external rate of return by starting your own business and putting that capital to work for you without interrupting the compound interest curve, which is key.

Nelson Nash, the author of the bestselling book Becoming Your Own Banker, put it so eloquently, “When you have access to money, opportunities will find you.”

If you’re considering a specially designed whole life insurance policy designed for cash accumulation, whether the traditional design or a limited pay policy to meet your needs, visit our website at Tier1Capital.com to get started with your free strategy session today.

You can hop right on our calendar, or if you’d like to learn more about how we put this process to work for our clients, check out our free webinar, The Four Steps to Financial Freedom. It’s right on our homepage.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

The Saving Dilemma

We’ve all heard that you should pay yourself first and save for your future. But not everyone does it. Are you saving for your future? Is it 10% of your income? Is it 15? Is it 20? Are you saving anything? And if you are, are you saving in a place where you have access to that money?

Today, we’re going to talk about how to strategically save for the future so that you’re able to meet your long term goals of retirement and your short term and intermediate goals as well.

So a universal financial goal that most people have is to someday retire. But what about your other goals? How do you achieve those as well as your retirement? We call that the savings dilemma. Should you save only for long term goals or should you save for short term goals or should you save for both? And the problem is, once you make a decision whether it’s short term, intermediate or long term, you’re literally eliminating the other choices.

In other words, if you’re saving for long term goals like retirement in a conventional, traditional retirement plan, that means that money is not accessible or available to you for the short term needs that you’re going to have from the time you start saving until the time you go to retire. We call that saving in buckets, but that’s not necessarily the best strategy because you can’t access that money without penalty before age 59 and a half.

But what happens when you want to get married or put a down payment on your house or send your children to private school? Where is that money going to come from?

Now, a lot of times people say, “Oh, well, by the time those events occur, I’ll be making more money”. Well, maybe you will, maybe you won’t. And in all probability you will. But that still doesn’t negate the fact that saving in buckets is a very inefficient way of saving. When we’re looking at savings vehicles for our clients, we’re looking at somewhere where they’ll have complete liquidity use and control of their money without penalty is everywhere along the way.

You see, you may be making more money in the future, but what you can’t recapture is the lost opportunity cost for those years when you’re building up your income. When it comes to compound interest, there are only two variables in that equation and that’s time and money.

With time, we could never make it up. So it’s important to start saving as soon as possible and never jump off that compound interest curve because you could never make up that lost time.

It’s often said the more time you have, the less money you need to put away. The less time you have, the more money you need to put away.

 

The key is if you’re saving everywhere along the way and you have access to that money and you’re never jumping off the compound interest curve, well now you’re in a position where your money is always working for you, but you’re also in a position where you could access that and use it for the things of life, those things that come up, whether they’re emergencies or opportunities.

The most frustrating thing in life is to have an opportunity come your way and you’re not in a position financially to take advantage of it. Why? Because you don’t have access to your money. You see, we believe that there’s more opportunity in protecting yourself against the losses than trying to pick the winners. Our goal is to help you make your money as efficient as possible so that you’re able to achieve your financial goals regardless of what’s going on in the market or the bigger economic environment.

And when we say losses, we’re not only talking about market losses, we’re talking about the lost opportunity of paying taxes, the lost opportunity of paying fees, the lost opportunity of paying interest to an entity that you don’t own or control, and the lost opportunity of having to access your money and jumping off the compound interest curve.

One of the ways we help our clients to become more financially efficient is by using specially designed whole life insurance policies designed for cash accumulation so that they’re able to access their money that they build up for major capital purchases or to take advantage of opportunities or to expand their business.

By utilizing the loan provision within these policies, they’re able to earn continuous compound interest within their policy and still access the cash value to make these major purchases or take advantage of opportunities. So you have the potential to earn an internal rate of return within the policy uninterrupted, as well as the opportunity to take advantage of financial opportunities that come up.

Another benefit of this process is that you’re always paying yourself first. You start where you are with what you can afford, whether it’s 5% of your income or 20% of your income, and you continue to save as a matter of course and your money continues to grow and compound within the policy and all the while you have access to it via the loan provision.

The value of this process is really startling because what happens is wherever you start, whether it’s saving 2% of your income, 5%, 10% over time, you get to a point where you’re saving a significant amount of your income and it doesn’t feel like it’s reducing your lifestyle. Why? Because you have access to all the money that you were able to save in those previous years.

So your savings percentage increases as well as your total net worth. As you build up the cash value within the policy, you have access to that cash to pay off credit cards, student loans, put a down payment on the house. This policy can go with you through all stages of your life. At the end, you have access to it to supplement your retirement income and ultimately to pass down as a death benefit to your loved ones or a charity of your choice.

If you’d like to get started with this specially designed whole life insurance policy designed for cash accumulation to help meet your savings and financial goals, be sure to visit our website at Tier1Capital.com to schedule your free Strategy Session today.

Or if you’d like to learn more about exactly how we put this process to work for our clients, check out our webinar, The Four Steps to Financial Freedom.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.