Insight & Analysis

The Power of Leverage: Grow Your Wealth with Smart Financial Strategies

Are you looking to get the most bang for your buck? Well, here’s the secret. It’s called leverage.

There are many definitions of leverage, but the one I like best in financial terms is to use the least amount of money to control the greatest amount of assets. Think about it. For real estate investors, what do they do? They borrow other people’s money. They get bank loans to buy real estate, and then they let their tenants pay the mortgage.

When you’re investing in real estate, you want to put as little down on that property as possible, right? The reason why is that the more control of your cash you have, the more investments you can make down the line. You have your money working for you, as well as other people’s money working for you as well as the mortgage.

But many times we run into people who say, I’m buying a piece of real estate and I’m going to pay cash for it. Let’s say it’s going to cost $250,000, my question to them was, why are you doing this?

“Number one, it’s a good investment. Number two, I’ll collect the rent.”

Well, that may be true, but think of it this way. If the rents were that good if you use leverage to purchase that property instead of using $250,000 to control one piece of property, that same individual can use $250,000 to control five properties. Then you would have five rents coming in.

So if you were to pay cash for a purchase, what often isn’t taken into consideration is the opportunity cost. You don’t consider what that money could have been earning you had you not parked it in that investment or that piece of property.

What we see is the interest we’re going to pay when we finance. What we don’t see is the interest we would give up by paying cash. We fixate on the things we see and we completely ignore the things we don’t see.

So how do you get the maximum return on your money? Well, the secret lies in using the least amount of dollars to purchase the biggest assets possible. The way you do that is by using other people’s money.

For example, a bank with a mortgage. Another example is using a whole life insurance policy cash loan to leverage against your existing cash value without interrupting the compounding of interest within your contract.

So the bottom line is having as little of your money in the game as possible so that you can create a larger net worth by leveraging other people’s money, whether that be money from a bank or money from the insurance company.

Now, you may be wondering, how exactly do I use a life insurance policy loan to make the best return possible on my money? Well, when using the policy loan provision, your money doesn’t ever leave your contract. The insurance company gives you a separate loan from their general account and places a lien on your policy cash value. Your cash value continues to grow and compound as if you never touched it because you didn’t, and you’re able to use the cash to go make outside investments and hopefully earn a higher rate of return.

So here’s an example of the evolution of using a life insurance policy to make real estate investments.

You fund a policy in year one with an annual payment. You borrow against the cash value of that policy to pay the closing costs. On the first piece of real estate, you buy. Two or three years later, you pay back that loan completely. You paid premiums for a total of three years and now there’s enough money to borrow against the cash value to pay not only the closing costs but also the down payment on that property.

Two or three years later, you pay back that loan and now there’s enough money to borrow against your cash value to pay closing costs and down payments on two properties. You just rinse and repeat over your lifetime. You’re building a large net worth in real estate as well as building a large net worth in cash value of your life insurance policies.

So you may be wondering, hey, what’s the difference? In both scenarios, I’m paying closing costs and the down payment, and getting a mortgage, and losing interest all along the way. However, using this method allows you to control the cash flow along the way and recapture the interest paid by passing it on in your legacy using the death benefit.

So using life insurance policy loans to make your investment purchases can make your money more efficient because you’re not losing out on the opportunity cost of your money. You’re still able to make the investments. And with time, you’re able to build a cash value that you own and control so that you’re able to make more and more purchases.

The trick is to leverage $1 to allow you to build an empire.

If you’d like to get started with a cash-value life insurance policy used and designed to leverage your cash to make more investments, schedule your free strategy session so we can talk specifically to your situation, or 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.

Personalizing Policy Design for Infinite Banking with Whole Life Insurance

If you’re looking into the infinite banking concept using a whole life insurance policy, I’m sure you’ve heard of the different splits. Do I do a 90/10? Do I do an 80/20? Do I do a 40/60? What is the best design for me and how do I get the most out of my policies?

There is no one-size-fits-all when it comes to infinite banking. The policy design really comes down to how you actually plan on using the policy. From there, the advisor can help you design a policy that meets your goals and objectives as to how you want to use it.

When looking at the best policy design for a particular client. We certainly want to make sure we’re within their budget and that we can design the policy properly so it can perform now, as well as in the future for them.

Another thing we take into consideration when designing policies is the long-term effect of the modified endowment contract status test. You see, that test, The modified endowment contract status test, is an ongoing test. You may pass it in the first year, you may pass it in the 10th year, but you may fail that test in later years. And here’s the deal. Once a MEC, always a MEC. What that means is once that policy is a MEC, it will be a MEC forever.

It’s hard to determine when you’re first illustrating a policy if and when that policy is going to MEC because when you’re illustrating a policy, it’s only based on the current year’s dividends. But dividend scales change every year.

Let’s take a step backward. What exactly is a modified endowment contract and what effects does it have on the policy?

Well, the government wants to make sure that you’re not using life insurance as an investment because it’s not an investment. So we need to make sure that for the amount of cash you’re stuffing in that policy, there is enough death benefit to justify it. 

If your policy doesn’t pass the seven-pay test, it could become a MEC. What that means is it becomes taxable like an annuity, meaning any loans or distributions above the premiums paid into the policy will be taxable and taxable as income when that is accessed.

But keep this in mind, the effects of the MEC, the fact that distributions are taxable don’t come into effect until the cash value is greater than the premiums paid in, which typically can be anywhere from seven years to 13 years down the line.

So what that means is your policy could be an MEC on day one, But you won’t have to pay taxes on that distribution until the cash value is greater than the premiums paid.

So let’s go back. What is the best policy design?

Typically with an infinite banking concept design in a whole life insurance policy, we’re looking at a 40 base and a 60 paid-up additions rider, meaning 40% of the premium is going towards supporting the base policy, The death benefit, the regular whole life insurance contract, and 60% is going towards paid-up additions and building up that cash value in the early years of the contract. This is typically a safer policy design to prevent your policy from MEC-ing down the line.

Because every situation is different, it may make sense to do a higher amount of paid-up additions in the early years. For example, if you’re just getting started and you need access to a lot of that cash value in the early years and you don’t want to tie it up in the policy, it may make sense to put on more paid-up additions with the knowledge that may cause a MEC down the line. So, again, there’s no one size fits all.

We had mentioned that there’s a 40/60 and that might be the typical best way to do it, but it doesn’t mean that that’s the way you should do it.

If you’d like to talk about your situation and what policy design best suits your needs, hop right on our calendar by clicking the Schedule your Strategy Session button on our homepage. Also, if you’d like to learn exactly how we put this process to work for our clients, check out our webinar, The Four Steps of Financial Freedom.

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

Unlocking Your Financial Ferrari: How an Old Life Insurance Policy Rescued a Family from Debt

Do you have a Ferrari in your garage, and you’ve never driven it? Someone recently reached out and they had a 12-year-old life insurance policy sitting doing nothing. This means they had cash value in the policy that’s accumulated over the last 12 years, and they’ve never put that money and deployed it in their financial system before. So we were able to create a plan for them to get out of debt.

You’ll hear us talk often about specially designed whole life insurance policies designed for cash accumulation. However, all life insurance policies have a cash value aspect built into the cake. You see, when you have a whole life insurance policy the insurance company is making two promises. The first is to pay the death benefit when the insured dies, as long as that policy is in force. The second is to have a cash value equal to the death benefit at the age of maturity, which is typically age 100 or 121. In order to keep that second promise, the insurance company is required to stash away more and more cash over time.

Now, the policy owners have something called a loan provision built into their contract, which guarantees them access to that cash value via policy loans. You see, these people bought their original policies for death benefit purposes, but they also had the cash accumulation.

Now, the policies were 12 years old. They were very well seasoned, meaning that at this stage of the game, the cash value increase was over $2 for every dollar they paid in premium. That was a really good moneymaking machine, so to speak. And I explained to them, it’s sort of like you have a Ferrari in your garage and you’ve never taken it out on the street. We’re going to give you the keys to that Ferrari so you can get it working for you, not the insurance company.

You see that policy has that cash value that you’re able to access through the loan provision on a guaranteed basis. You’re able to repay it within your cash flow because it’s an unstructured loan from the insurance company. And what this family is able to do is borrow against their cash value and pay off this high-interest credit card.

Now, the key here is that as they repay that policy loan, it’s going to reduce the lien against their cash value and they’ll have access to more and more cash value over time. With that, they’ll be able to pay off all of their credit card debt using this process. The beautiful part about it is that they’re going to get out of debt quicker than if they put all of their payments and snowball them on one credit card, then the next, then the next.

That’s the amazing thing about this. Because now they’re filling up that policy equity with two hoses, the premium hose, and the loan repayment hose. Before they were only filling it with the premium hose and they weren’t even tapping into it.

You see, there’s a big difference between paying off debt with a regular snowball and just putting all your cash flow towards getting out of debt as soon as possible versus using a policy loan. Because if you just snowball the traditional way, you spend all of your money and send it all off to the credit card companies, and at the end of the day, what do you have to show for it? Nothing. A zero debt balance.

However, when you use the policy loan to get out of debt, at the end of the day, you have a policy full of cash value that you’re able to access and leverage again, so you are less dependent on those credit companies in the future when it comes to finance your next purchase.

Another key distinction between policy loans and traditional debt is that there’s no qualification. It doesn’t impact your credit score. So actually, their credit score is probably going up after they pay off that credit card debt. And it’s an unstructured repayment schedule so that they’re able to fit the payments into their cash flow.

If they’re feeling cash flush and have a lot of extra cash flow, they can put extra towards that policy loan and get it paid off and built up faster. But if they’re feeling pinched and they only want to make a small amount, they have the flexibility to do that with no questions asked. Because the entity that is guaranteeing that debt is the insurance company, and coincidentally, the insurance company is also the one who’s lending the money to the insured.

And here’s a better distinction when they made the credit card debt, they had to actually apply for the credit card and get permission for that lending amount. They were applying for permission from the bank or the credit company to give them a revolving line of credit. When they went to get the policy loan they were giving an order. They were literally telling them, This is what I want, go get it for me. That is not a small distinction.

The bottom line is, would you rather be controlled by the process or be in control of the process? Do you have a life insurance policy just sitting around doing nothing while you’re accumulating debt?

If that sounds like you, hop right on our calendar by clicking the Schedule your Free Strategy Session button. We’d be happy to talk to you about your situation and how to get you on the path to financial freedom.

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

Decoding Debt: Good vs. Bad – Surprising Insights!

Do you realize that there’s a difference between good debt and bad debt?

You see when I started in financial services, we were told that all debt was bad. But it wasn’t until I put things into practice that I realized, there’s actually good debt and bad debt.

You see, good debt is debt that’s backed by an asset. Bad debt, such as credit card debt, or student loan debt, are debts that are not backed by any assets. You see when you take out credit card debt or go and get a college degree and take on student debt, they give you that debt, that asset, that money to fund your purchases based on your ability to earn income and the potential to pay them back. They don’t have anything collateralized against an asset.

So what are some examples of good debt, and what does that look like, and how do you use that to get ahead financially?

Well, let’s look at a mortgage. You have the house as collateral against the mortgage. And in general, you’re going to have to put up some of your money. It’s called a down payment. So you might buy a $250,000 house, put down $40,000 as a down payment, and you’re financing 210.

Well, the bank’s in pretty good shape because if you default on that loan, the bank only needs to sell that house for 210,000. And the house theoretically should be worth 250,000. They should not have any problem getting equal with what they owe.

Now, let’s contrast that with a car loan. Typically, a good car loan is five years. It takes five years to pay that loan back. And that pretty much keeps up with the price of the depreciation of the value.

However, car loans these days, because the price of cars is now astronomical for any car, many people are financing over six or seven years. But what happens is if something happens to that car or you default on the loan, the value of the car is often less than what you owe on that loan.

The going rate on a car loan is about eight and a half to 9%. The going rate on a mortgage is six and a half to 7%. And the banks know this. That’s why they’ll give us a lower interest rate for an asset that has much greater value.

Let’s take a look at a third type of collateralized loan, a life insurance policy loan. Life insurance policy loans are leveraged against the equity of your policy, the cash value, and the unique thing about this is that the entity that’s giving you the loan, the insurance company, is also the entity that’s guaranteeing the cash value, the asset.

So consequently, they’ll charge you probably a much better rate. And more importantly, those loans are unstructured, which means you determine when, if, and how you pay back that loan. 

Now, it is recommended that you cover at least the cost of the annual interest. You see each policy anniversary if you have an outstanding loan, the insurance company is going to charge you a loan interest bill. It’s recommended that you pay at minimum the loan interest because if you don’t, it’ll accrue onto the loan principal balance.

I was taught that all debt was bad. Then I found out that there’s actually good debt and bad debt. And through practice, we found that there’s actually better debt, and that’s debt that you own and control. That is a life insurance policy loan.

If you’d like to get started with a specially designed whole life insurance policy designed for cash accumulation, schedule your Free Strategy Session today.

Also, if you’d like to learn more about exactly how we put this process to work for our clients, check out our free webinar right on our home page. The Four Steps to Financial Freedom. It outlines exactly how we put this to work.

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

Am I Too Young for Life Insurance?

I got my first life insurance policy as soon as I graduated from college. Now, this may seem counterintuitive to some people because I had just graduated college, and I didn’t have a family. What need did I really have for life insurance at that time? Well, I use that policy as a savings account, a savings vehicle, so I can accumulate wealth and keep control of it without the risk of losing any money.

When I’m talking to people about getting started with the infinite banking concept or a specially designed whole life insurance policy designed for cash accumulation. What I always say is you should start where you are with whatever cash flow is manageable for you.

Now, there are some caveats in that, with making sure the policy can be properly designed. So typically, multiplying your age by ten is a good monthly basis for you. So if you’re 20 years old, that would be a premium of $200 per month.

Now, what’s the benefit of starting young? Well, the sooner you get started, the sooner you’re able to get into the habit of saving and compounding interest within your policy.

In the early years, the compounding was really not significant. But the reason you want to start sooner rather than later is because of the compounding effect on the back end. When you have this policy, in effect for 40 and 50 years, your compounding annual increases are going to be significant. The longer you put off starting. The more you’re going to punish yourself.

As a rule of thumb, you should be saving about 20% of your income on a monthly basis. These policies are a great way to set up systematic savings and get you in the routine of that money is automatically taken from your account and put in a place where it could grow, compound, and still be accessed for financing your own purchases.

When you start planning, you don’t have a need for death benefits, you have a need for cash. You’re planning for your future needs for cash, because as we always say, you finance everything you buy. You’re either going to control the process or be controlled by the process of financing.

You see, at the age of 22, I didn’t necessarily know what my financial goals were going to be down the line, but I knew I was able to access a portion of that cash value for whatever I needed. I used it to go on vacation with my friends and paid myself back. I used it to get out of credit card debt and pay myself back. I used it to knock down my student loans and built that cash value back up.

And the thing is, once you start taking policy loans to pay off these things and to finance these things of life, your cash value continues to grow. Because I’m already putting in premium deposits and growing and accumulating that cash value. But once I start taking money out and paying it back in, that’s also contributing to the accessibility of cash within my policy, versus if I was just to do the traditional method of paying off Visa. At the end of the day, I’d have nothing to show for it.

And keep this in mind, when I took that loan, I took it against the equity or the cash value of the policy. That money never left the policy, and consequently, it continued to earn uninterrupted compounding interest. Every time I made a payment it increased the availability of more equity that I could use for another loan for another life event.

You see, my policy is with a mutually owned whole life insurance company. Meaning, that I am part owner of that company as it relates to my policy. Also, they use non-direct recognition, Meaning the performance of my policy is going to be the exact same. Whether or not I take a policy loan against that cash value.

When I take a policy loan, the insurance company gives me a loan right out of the general account of the insurance company. And they place a lien against my cash value and the policy. And what that means is, as I repay the policy loan and that lien gets reduced, I have access to more and more cash value over time.

So the point is, I am in complete control of this process. And if I ever needed to stop making a monthly loan repayment to the policy, I could do it. If I wanted to double down, I could do that. If I wanted to cut the payment down, maybe in half, I could do that. The point is, I’m in control of the whole process. And that’s not a small distinction.

I would much rather be in control of the financing function in my life rather than be at the mercy of the banks and credit companies in order to be financially free. You see, whoever controls your cash and whoever controls your cash flow controls your life.

With a policy like this, you are in control of your life.

If you’d like to get started on your path to financial freedom, it’s never too early or too late to start. Be sure to schedule your Free Strategy Session today. We’d be happy to speak to you about your specific situation.

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

Unraveling the Stealth Tax and How Inflation Impacts Your Wallet

Have you noticed it costs a lot more simply to exist these days? They call inflation the stealth tax because it’s not written in the tax code, but it affects every single one of us. So what impacts inflation?

First and foremost, it has to be the amount of money in circulation. The Federal Reserve, which is not part of the federal government, defines M2 money supply as the amount of money in circulation, plus money set aside in retirement accounts.

So why does that matter? Well, 20 years ago, the M2 money supply was $4.9 trillion. 20 years later, it stood at over $21 trillion. In 20 years, it grew by 400%. The reason that impacts inflation is that you have more dollars chasing the same amount of goods and services. That increases the price of those goods and services. 

So basically, as the government is digitally printing more and more money, the value of that dollar is going down every single time. And what’s happening is, as the government’s trying to decrease inflation, they’re putting a squeeze on that money supply, taking money out of circulation to try to bring inflation back down to a reasonable rate of what they define as 2%.

But what impact does that have on us as consumers, whether we’re a family or a business? Well, we’re fighting to buy the same goods and services with a pre-inflation cash flow in many cases, it could cause a severe cashflow pinch in your economic system. Our money has less buying power, meaning we’re buying fewer goods and services with the same dollars. That’s called the depreciation of the dollar.

One of the most recent pinches that we felt is with homeowners insurance because it only comes around once a year. But all of the costs of labor and materials have gone up so much that the cost of insurance for your home has also increased because it’s not locked in.

Here’s another thing that impacts our finances. 20 years ago, the federal debt stood at $5.6 trillion. Today, it’s over $32 trillion. In five years, it’s projected to be over $40 trillion.

Have you guys ever checked out nationaldebtclock.org? It’s kind of freaky.

Although the national debt is projected to increase by 70% in the next five years, the amount of taxpayers is only projected to increase by 8%. Where is the government going to get the tax dollars to pay for everything? And what impact will that have on our ability to live our lives and save for the future?

This is why it’s important to pay taxes on our dollars now and pay debt on our income now, rather than postponing it into the unknown future. Because the government has obligations and they’re going to have to pay for those obligations, but they’re not our obligations. By paying taxes on our income now, we’re not postponing that into the unknown future and taking it one step further and saving in a place that’s sheltered from taxes, where we pay taxes on the money once and then never have to pay a second time, is imperative to our financial security going forward.

Wouldn’t the best way to make your money last longer be to reduce or eliminate the taxes that you’re going to have to pay in the future? This is why it’s important to make your money more efficient. And again, one of the things that you can do is to shelter your money from taxes, but also do it in a way that you have access to that money. So you’re not deferring the tax, or kicking the can down the road, you’re sheltering the money. That’s a big difference.

If you’d like to learn about how we put this process to work for our clients so that you’re able to keep the money in your family and your business and out of the government’s checkbook.

Check out our free web course, The Four Steps to Financial Freedom that details exactly how we put this process to work. Or, if you’re ready to get started, feel free to schedule your free strategy session today.

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

Revealing the True Cost of Your Money

Something I’m sure you heard us say before, is you finance every single purchase you make, you either pay cash and give up interest that you could have earned on that money, or you finance and pay up interest to another entity outside of your control.

Nelson Nash used to say this is Basic Finance 101. You’re either going to pay interest when you borrow or give up interest when you pay cash. The consulting firm Stern Stewart & Company charged their clients for consulting on how to make better financial decisions with their money based on Finance 101.

The problem was these multinational corporations were making poor decisions with their capital. They were recognizing the fact that when they borrowed, they paid interest, but they put a price on their own capital of zero. And consequently, they were making bad decisions with their money.

And here’s the point that Nelson Nash was making: your money, your capital has a cost. To think that your money does not have a cost basically means that the laws of gravity don’t apply to you.

Let’s take a look at that example.

Say you need to make a major capital purchase and the bank is going to charge you 8% to finance. And you’re putting a capital cost of zero on your money. The blended rate, the actual cost of that money would be 4%. In this example, if you were to earn 6% on that purchase that would be an acceptable rate of return. Because 6% is higher than the 4% blended cost of that capital. Basically, you’re making a profit. But in this scenario, there’s a fatal error baked into this cake. That is, your money has no cost.

What people don’t realize is that it’s very hard to acquire capital. It’s hard to save money. And if you have money sitting around waiting to be deployed, the worst thing you could do is deploy it in a way that is detrimental or costing you money. And this is what Stern Stewart pointed out to their clients, their capital had a cost. 

We see this all the time. People will say, hey, why should I take a policy loan and pay the insurance company? 5% when I have cash sitting in the savings account, earning 0%? But there’s a cost to that capital.

First of all, there was a cost emotionally to build up that capital, and to deploy it without taking advantage of any opportunity cost that could be earned on that money, is not being a good steward of that cash.

Now we’re going to take a look at that same decision after applying economic value added. Economic value added is a financial measurement of your use of capital. It will indicate the profitability of your operating decisions or how you’re using your money.

So looking at that example, again, the borrowing rate is 8%. So we know what it’s going to cost to finance. But now the market environment where you could invest your money has an average return of 12%. That becomes the cost of your capital. If you can’t get 12% on your money, then you would be better off putting your money in the market.

In other words, if you’re going to buy a piece of equipment and you can’t get at least 10 to 12%, 10 is important because that’s the blended rate. If you’re borrowing at eight and you can invest at 12, your blended cost of capital is 10%. If you can’t get at least 10% out of that opportunity, then there’s no sense taking advantage of it. You would be far better off or far better served by just putting your money in the market.

At Tier 1 Capital, we look at things through the lens of control and making your cash flow and your money work as efficiently as possible for you, your business, and your family. If you’d like to learn exactly how we put this process to work for our clients, check out our free webinar, The Four Steps of Financial Freedom, which lays out exactly how we do it.

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

Guaranteed vs Non-Guaranteed Values of a Whole Life Insurance Policy

When you’re dealing with a whole life insurance policy, whether it be a normal whole life insurance policy or a whole life policy designed for cash value accumulation, there are a few values that you may want to look at. The guaranteed values and the non-guaranteed values. And you may be wondering what’s the difference between the two.

Assuming you purchased a life insurance policy with a mutually owned life insurance company, you’re going to have guaranteed values and non-guaranteed values listed on any policy illustration.

Basically, the guaranteed values are the worst-case scenario. How is this policy going to perform if there are no dividends credited toward that policy?

You see when you’re looking at a policy illustration, there generally are two columns. One column for the guaranteed values and one for the non-guaranteed values. The guaranteed values assume no dividends are ever paid in any year. The non-guaranteed values assume that dividends are paid at their current rates prospectively into the future. When you’re looking at those non-guaranteed values, the only thing that we can guarantee is that those numbers are not going to be what you actually experience. 

You see, that stands true for the guaranteed and the non-guaranteed values in most cases with these mutually owned companies because as soon as a dividend is credited towards your policy, the guaranteed values change. The only non-guaranteed dividends are those that haven’t been credited yet. Once that policy dividend is credited, it’s set in stone. However, next year’s dividend is not. That’s to be determined.

You see these illustrations show you the worst case scenario and a scenario projected going forward, and the scenario projected going forward based on today’s dividend scale. However, neither of those values is actually accurate. You see, dividends could be better in the future, they can be worse in the future. Meaning that they don’t necessarily have to declare and pay a dividend.

However, the companies that we recommend have been paying dividends for a minimum of 125 consecutive years. They’ve paid dividends through world wars, recessions, and depressions. The assets of the life insurance industry actually grew during the Great Depression. So as bad as things got, the life insurance companies were a rock during stormy times.

One of the reasons why we love these whole life insurance policies so much is because they’re actuarially designed to get better and better every year. They’re not dependent on the stock market or other economic factors. They depend on the well-being and the profitability of the insurance company.

There are three things that are going to determine the performance of your policy. 

Number one, the insurance company has to assume that people die. That’s assumed mortality. Insurance companies are really good at overestimating the cost or how many people are going to die. If there’s a saving on the mortality costs, meaning people die later rather than sooner, that money gets to be used or transferred over to the dividend account.

Similarly, the insurance company assumes what it’s going to cost to administer the policy. Again, they usually overestimate what it’s going to cost. And any savings are transferred over to the dividend account.

Lastly, the insurance company needs to put that money to work. All of those savings get put to work or invested into various asset classes and they use the interest rate that they earn on that money to further build the dividend account.

In conclusion, those illustrations that you see, can and will change. One thing that is for sure, though, is that after you have cash value credited to your policy, you can’t lose that money.

If you’d like to get started with the whole life insurance policy designed for cash value accumulation, schedule your free Strategy Session today or check out exactly how we put this to work for our clients and watch 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.

The Value of Life Insurance: How Much Can I Insure

Have you ever wondered how much life insurance, is too much life insurance? Well, here’s a secret. A life insurance company won’t insure you for more than you’re worth.

Now there are a few ways you’re able to calculate the value of a human life. These are methods that the insurance companies use to determine how much life insurance you’re actually able to get on a life for each different purpose. 

One method is called income replacement. The insurance company takes your current income and projects how many years you should be working to determine how much life insurance death benefit you can have on your life.

For example, if you’re in your twenties or thirties, or even your forties, the insurance company might determine that you could apply and receive a policy in the amount of 30 times your current income.

Contrastingly if you’re later in your life, the insurance company may determine that you only qualify for, let’s say, five years of your income. And that’s simply because we’re using a calculation to determine how much income you’re going to be losing if you were to die prematurely.

This is why it’s important to find the balance between when you’re making a decent income and when you are still young. That way you could get the maximum amount of death benefit on your life.

Another thing that the insurance company will take into consideration is the amount of debt that you have. It could be that you qualify for 30 times your income, plus 100% of your outside debt: mortgages, business equipment, car loans, or student loans. They’ll allow you to insure that separately over and above your income.

Another thing the insurance company can take into consideration is your net worth. They’ll take your assets, subtract your liabilities, and determine what is your net worth. Based upon that, they may allow you to insure 100% of your net worth. So that pretty much encompasses the personal uses. 

However, there’s also a business side. If you are a key employee of a business or an owner of the business, there’s a separate calculation that would be determined for additional death benefit coverage on your life. 

So if you’re a business owner, you can ensure the value of your business interest. For example, let’s say you own a business that’s worth $500,000 and you’re a 50% shareholder or 50% owner of that business. Your business interest is 250,000, and you could purchase up to $250,000 of life insurance coverage to insure the value of your business interest.

Another business use for life insurance is a key employee policy. With that, the insurance company is able to calculate the value of that key employee as it relates to the business, and you’ll be able to purchase a life insurance death benefit for that key employee. You’re able to have both a business policy where you’re insuring your equity in the business, and if you’re a key employee, you could have a separate policy or separate interest for the key person.

Life insurance companies are in the business of insuring risk. The thing they will not do is provide insurance for more than what the risk is.

You see, adverse selection is a distortion of market value. And simply what it means is you’re insured for more than you’re worth. Just like you couldn’t purchase a $500,000 piece of property and be insured for $10 million. The same thing applies to life insurance. You can’t take somebody who’s earning $20,000 per year and get a $50 million life insurance policy on them. The insurance company knows that there’s adverse selection in that situation.

That’s why it’s important to know all of these nuances or have your insurance agent know all of these nuances so that they’re able to advocate for you to get the most death benefit possible if that’s what you’re looking for.

If you’d like to get started with the life insurance policy, be sure to schedule your free Strategy Session today. And remember, it’s not how much money you make it’s how much money you keep that really matters.

Transitioning From Earned to Passive Income

As you go through life, everything changes. The only thing certain in life is, in fact, change. So when you first get a job or you first start in business, your goal is to create 100% of your earned income to support your lifestyle. And as time goes by and you evolve towards retirement, your reliance on earned income will go down and you will transition to 100% of your lifestyle being funded by passive income. And as we’re evolving from 100% earned income to 100% passive income, there are various stages.

Now, whether you are a W-2 employee or a business owner, When you’re first starting out, oftentimes you’re just making enough to get by. All you want to do is to support your expenses and your lifestyle. However, over time, and as things change, hopefully, you’re able to earn some more. Maybe you got a promotion or expanded your business. 

You’re earning enough income to not only cover your lifestyle but also to put money away in a savings account or an emergency fund. And then phase three, really simple. You have enough to cover your lifestyle. You have enough for your emergency fund. And now you can start investing to create assets that will generate passive income. And the fourth phase is when all of your lifestyle can be covered with income from passive sources.

According to a recent study by Intuit, 61% of business owners around the world struggle with cash flow. That means they’re not covering their lifestyle. 69% of business owners either sleep less or admit to losing sleep due to cash flow concerns. And the point is these people are having trouble covering their overhead. So it’s almost impossible for them to start saving because they’re dealing with these cash flow issues. 

So the question becomes, how do you transition between these phases? A lot of times people try to go from phase one all the way to phase three, where they have passive income generated for them through their business. However, it’s important to build a foundation of savings that you have liquidity, access, and control over so that you are not completely bogged down by debt and other financial pressures that come with these big expenses.

That’s why it’s really important to go from phase one to phase two. You need to create that emergency fund, that savings that can be your backstop whenever you go to another phase and then all of a sudden the rug gets pulled out from under you.

One way we help our clients to build that safety net and to build an actual pool of cash that they have liquidity use and control over is by using specially designed whole life insurance policies designed for cash accumulation so that they’re less dependent on banks and finance companies and they’re actually able to own that finance function in their own life.

So instead of going to the bank down the street to finance a purchase for their business or their family or anything like that, they’re able to go to an entity that they own and control and they have a contractual guaranteed access to that cash to finance the things of life. Whether it be a business purchase, like a new vehicle, or they want to go on vacation with their family and they need the cash flow to do so.

The key there is that because they’ve taken this step to create that savings through a specially designed life insurance policy, they now have access to capital and nothing is telling them that they can’t take some of that money and use it to grow their business, to create passive assets. And that’s the key. 

You see, these policies are great for a few things. Number one is getting out of bad debt and debt that has an excessive amount of interest being charged or maybe you want to refinance that debt through the policy so you own and control those terms.

Also, it’s a great place to warehouse wealth because you have tax-deferred growth within the policy as well as guaranteed access through the policy loan provision and it’s also a great place to store money for investments.

You can put money into the policy and then borrow against the cash value in that policy to go out and make investments so you’re able to earn a higher rate of return on your money. Whether that be investing in your business or a great stock opportunity, or maybe you want to make a loan to your family member.

The possibilities are endless with these policies because you own and control the financing function the only person you need to qualify for the loan with is you. And that’s a key point. You’re not asking permission when you request a life insurance policy loan. You’re giving an order that is not a small distinction.

If you’d like to get started with this process, be sure to schedule your free strategy session today. Also, if you want to learn 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.