Last week, we got a call from a client who got an unexpected $25,000 tax bill. Coincidentally, at this came at the same time as his premium bill, loan interest bill and loan principal bill. He called us and he said, “Guys, do I really need to pay all of this stuff for the policy?”
If you are in a similar position where you have limited cash flow and are wondering what order and priority you have to pay first, stick around to the end of this blog post because we are going over all of the details.
When you get a premium bill and your cash flow is limited, keep in mind that you should always pay the base premium first. When our client called, we showed him that his premium was about a little over $20,000 per year but his policy was over 16 years old. So his cash value increase was going to be over $32,000 from this 16th year to the 17th year. Once he did the math, he realized that he should definitely pay the base premium because for every dollar he put in the premium, he will get a cash value increase of $1.50.
So it makes sense to pay the base premium. And that’s the number one priority, pay the base premium. Especially as your policy matures. It will may seem to be more challenging to realize, but the more you pay into the policy at that time, the higher rate of return you’re going to get within your policy. So always pay the base policy first.
After you pay the base premium, the next thing you should look at paying is the paid up additions rider, if your policy has one. Especially in the first five years. By paying the paid up additions rider in the first five years, it will give you access to more cash sooner so that you can start using your policy to pay for the things of life. The reason why you want to pay the paid up additions in those first five years is because it takes a little bit of time for the policy to mature on its own. After those first five years are up, you may consider closing out the rider or opening the window so you could put money in at a later date.
The third priority to pay is the policy loan interest. The reason why this is third is because, if you don’t pay the loan interest, the loan interest balance will be added to the loan balance and it will may constrict the amount of cash value that is available in the future to access via the policy loan provision.
The fourth area to be paid should be the actual loan balance. By paying the loan balance and as your loan balance gets paid down, your cash equity increases. That puts you in a position where you will have more access to more money later on to accomplish your goals. With the loan balance, every dollar you put in is accessible via the loan provision. A lot of times, this is tricky for our clients to wrap their heads around with this idea because we are trained that debt is bad. But that’s not necessarily the case with policy debt. We are not taking money from the policy. We are putting a lien against the policy. So your cash value will continue to grow and earn dividends as if there is no loan against it. But by paying it down, if you have the cash flow to do so, you will have more access to cash as you pay back your loan. Also, there is less loan interest built for your next policy loan anniversary.
So let’s summarize the order of priority for paying policies. First base policy premium, second paid up additions rider, third loan interest, and fourth loan principle.
If you have more questions or would like to talk to us, 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.
If you’ve been reading our blog posts for a while, you will know that we often talk about using specially designed whole life insurance policies to help our clients accomplish their goals. Sometimes, people come to us and say, “Hey guys! This seems like it’s too good to be true. What’s the catch and why aren’t more people doing this?”. If you’re interested in having those questions answered, stick around to the end of this blog post.
People come to us because they are generally frustrated that they’re making a good income and they are doing everything by the book according to the so-called financial experts. They are maximizing their retirement accounts. They are paying down their mortgage and they are saving for their two children for college. But they just don’t seem to be getting ahead. They feel frustrated because they don’t have access to money when there’s a financial or medical emergency, or they don’t have access to money when there’s an opportunity that they’d like to take advantage of. Because of that frustration, they seek assistance from financial advisers who could help them.
We met with a client who was a surgeon. He and his wife were very frustrated because they wanted to take their children to Disneyland. It was only going to cost $13,000. They make $800,000 a year and they were frustrated because they didn’t have access to their money. Why? It’s because they were maxing out their retirement accounts. They were saving money for their children’s college education. They were paying down their mortgage. So they didn’t have access to any of the money that they made.
Clearly it’s not the income that was holding the family back. It was how they were using their money. That’s why we always preach, “It’s not how much money you make. It’s how much money you keep that really matters”. One of the first things we do when we meet with clients is take a look at their personal economic model. We look for inefficiencies. Places where they are giving up control of their money unknowingly and unnecessarily. Unknowingly, meaning they’re not aware that they’re giving up control of that money. Unnecessarily in a sense that, they could actually change it. Although not necessarily that they could change it as quick as a snap of a finger. That’s one of the first things we look at and that’s really why we focus on regaining control of your money so that you could get rid of those frustrations and you could accomplish what you want with your good income.
Regaining control of your money means putting you in a position where you could access your money when you need it. When we talk about plugging those leaky holes in your financial bucket, it’s literally identifying the five major areas where you are giving up control of your money. Those areas are taxes, how you fund your retirement, how you pay for your children’s college, how you pay for your real estate mortgages and how you make major capital purchases. We do a deep dive as to how you’re using your money in these five areas to show you exactly where you’re giving up control of your money.
Where am I giving up control of my cash flow?
It all becomes so simple. Whoever controls your cash flow controls your life. We find it very important to identify the exact places where our clients are giving up control of that cash. So they could regain control of their financial life. Keep this in mind, anywhere you place your money, besides under your mattress, is a financial tool. They are all financial products. But the products we use to help our clients accomplish their goals are specially designed whole life insurance policies, specifically designed to accumulate as much cash value as possible and as quickly as possible.
The reason why we do this is to help our clients accomplish short term, intermediate, and long-term financial goals; Short Term Goals – maybe it’s paying off debt or planning to go on a vacation. Intermediate Goals – could look like saving for a wedding or a down payment on a house or sending your kids to college. Long Term Goals – would be planning for a retirement, supplementing your retirement, or using the cash value on a tax favored basis to supplement your retirement income, as well as leaving a legacy for your family.
When we’re recommending a financial product to our clients, we have a few things in mind.
Number one, they need to have access to that money, complete liquidity to use and control so that they can use it for whatever they need, whenever they need it, no questions asked.
Second, we want them to be safe. Safe from market losses and their money protected from Wall Street and creditors, if they are subject to a lawsuit or bankruptcy. Finally, safety from the government so that if the government increases or changes taxes, their money is protected.
The next thing we want is continuous compounding so that they could access their money, but still earn interest. As if their money is in two places at once. And think of this. What’s the rate of return? Getting $1 to do two jobs.
Finally, we want a reasonable rate of return. Let’s say somewhere around three to four percent.
If we can get all of those things with one product, then that really helps us to accomplish our client’s goal of having access to their money, but more importantly, making their money more efficient.
We believe that there is more opportunity in helping our clients avoid the losses than trying to pick the winners. Using this specially designed whole life insurance policies allows us to accomplish all of the things mentioned above and so much more. Because they are able to take advantage of opportunities when the stock market is down or when a business opportunity comes up. They are able to pay off their debts or buy a car. They’re able to use that money, however they want to use it without interrupting the compounding of interest. This is such a powerful tool.
Now that we’ve listed all of the benefits that you can get from owning cash value life insurance. Let’s talk about what it won’t do. It will not give you the highest rate of return in the shortest period of time. For a lot of people, that’s a deal killer. But that’s okay because you see, we’re worried about helping our clients who want to regain control of their money, who are sick of being frustrated from not having the cash to accomplish their short term intermediate and long term goals. The cash value life insurance gives them the opportunity to do those things we mentioned earlier.
We believe that there’s more opportunities in avoiding the losses and making your money more efficient and working for you consistently with no risk of loss than there is in picking the winners. That’s why we use this product so passionately.
Why aren’t more people doing this?
Well, it’s real simple. This is the way people used to save back in the seventies. But unfortunately the wall street model took over. IRA’s and 401k’s became popular or started in the seventies. The Wall Street model has pretty much taken over for the past 40 years. But prior to that, this is the way people used to save. But keep in mind, cash value life insurance has been around for over 200 years.
Ray Kroc used cash value life insurance to keep his business going when he was trying to figure out how to make money from McDonald’s. Sam Walton bought so much life insurance for many of his employees that he ended up paying a fine. Walt Disney borrowed against his life insurance when no bank would loan him money to start the theme park in Florida. Keep this in mind, banks are the largest purchasers of cash value life insurance. They take profits from their customers.They recommend the customer to put money in places where their money is tied up and then they take those profits. Put some of those profits in cash value life insurance.That’s very ironic.
So when the question is posed, “Why aren’t more people using this product?”. The answer is quite simple. Advisors today are not trained on how to use this product to its full potential. But for our company, we have been using this for several years with all of our clients, as well as personally. We use it to purchase cars, to invest in our business and send kids to college. All of the things that we’re talking about to our clients, we’ve done personally, and we’ve been doing it for several years. That’s the difference between us and most advisors. They are not trained on how to use this product and how to make it as efficient as possible for their clients.
If you are tired of feeling frustrated and stuck that your cash is pinched, or you feel like you’re doing everything right, but still can’t seem to get ahead and would like to learn about how you could put a whole life insurance policy, specifically designed for cash accumulation, to work for you and your family. Feel free to schedule a free strategy session or check out our web course where we go into great detail about how this process works. Remember, it’s not how much money you make, it’s how much money you keep that really matters.
