How Life Insurance Works As A Savings Vehicle
It’s a well known fact that one of the services that I offer to my clients is life insurance as a savings vehicle. We call it Wealth Creation Banking. I am often asked 2 main questions when I begin telling people about this.
#1: Isn’t life insurance bad?
#2: How does it work?
There are many different types of life insurance, so to believe “life insurance is bad” may be true for some types based on what you’re trying to achieve and it may be false for others. The type of life insurance I am talking about is whole life insurance. Now, as you’re reading this, you may be thinking “yes, that’s the type Dave Ramsey and Suze Orman said never to buy”. Let me ask you, what type of whole life are you not supposed to buy? That’s right! Within Whole Life Insurance there is more than 1 type! You can buy standard whole life, you can buy 3 pay, 5 pay, 10 pay, 20 pay, Paid Up Age 65, High Early Cash Value, or even a Modified Endowment Contract. You see, I used to sell term insurance for one of the largest term insurance agencies in the world and I was taught that Whole Life Insurance was a bad thing. However, I had no idea that there were so many types and that they aren’t all the same. The kind that I provide to my clients is called High Early Cash Value Dividend Paying Whole Life Insurance.
Let me tell you how it works.
You’re trying to save money right? Well no different than a savings account, life insurance can be a vehicle in which you deposit money for savings.
First, you will need to select the right type of policy. There are only a few companies that will design the policy correctly for what we need it to do.
You will determine first, how much money do you want to save per year. I like to base this off a % of income. Ideally, you should be saving 40% of your gross income. So let’s use that number. Then you decide what “mode” you want to save in (monthly, quarterly, annually, or even a few years in advance).
For example, let’s say you were saving $48,000/yr and you wanted to do it monthly. That would be $4000/mo that you’d save. No different than a savings account or a 401k contribution, every month you would pay yourself that $4000. With life insurance, it is automatically deducted from your account on the day of your choice each month on a recurring payment.
Now when the money goes into your life insurance, it is split into two different flows. Part of the money purchases death benefit. This is usually 5-30% depending on what you choose. Part of the money goes into your cash value. This is usually 70-95%. Now what does this actually mean? Well let’s say that 25% of your dollars went towards purchasing death benefit. This is life insurance, so you will own a death benefit. What is unique about Wealth Creation Banking policies is that death benefit no only acts as death benefit, but it also doubles as shares of ownership in the insurance company. That’s right! When you own death benefit, you own equity in the life insurance company itself. As an owner, you share in the profits of the company. This is called a dividend. Think of this similarly to when you purchase real estate. When you buy real estate, some of your cash is immediately available and liquid, however some of the cash is not available immediately and is locked up in the principal of the investment. While you cannot “use” this portion because it isn’t liquid, it does produce income. Death Benefit is like this. It is temporarily illiquid, but it produces a dividend of 6-8% on average.
The other portion of your money goes into your cash value. The cash value is the liquid portion of the policy. So if 25% of it went towards your death benefit, that would mean 75% of your funds went toward your cash value and is liquid & available for immediate use. Your cash value is like the savings account attached to the policy. It earns a minimum guarantee of 4%, and the excess dividends produced by your death benefit can earn an additional 1-3% on top of that, which is where we get our 6-8% from. This money in the cash value can be accessed immediately and it also grows tax deferred.
So far so good right? We have our death benefit that is where 25% of the money goes. We have our cash value which is where 75% of our money goes.
The death benefit produces dividends through ownership in the company. The dividends, combined with the minimum guaranteed interest rate are credited to your cash value. The cash value and earned interest will accumulate tax deferred.
Your funds, like any savings vehicle, will lay waiting for you to use them. While they wait, they will earn a 6-8% dividend and remain tax deferred.
Now let’s look at how it will work when you go to access your funds.
First, we need to understand how cash value works. Instead of pulling money out of your cash value, you borrow against it. Why? Let me tell you!
#1: Once your cash value balance, plus accrued dividends surpass the total you’ve contributed to the policy, you will have a taxable gain. If you withdraw that money, the IRS can tax it. Do you know what the IRS cannot tax? A loan.
#2 By borrowing against the money, your money never actually leaves the cash value. Meaning you still earn your 6-8% dividend while you use the money simultaneously. This means you could be earning 6-8% PLUS whatever you can earn with the money you’ve borrowed.
So what’s it cost to borrow? Usually 4-6% on an interest only loan that you pay to the insurance company. So let’s recap this. You borrow against your funds, avoid taxes, leverage the money and pay interest (to a company you own and generate profit from).
There’s a few ways you can structure your loans where the interest you pay can also be deducted from your taxes as well.
The result? You grow your money exponentially faster than a bank, avoid taxes, leverage the funds, and use it to acquire income producing assets.
Not bad right?
The downside? It’s a committed savings plan. This is not for wishy washy savers. This is for someone who wants to commit to saving every month, no matter what.
You also can’t use the money for just anything. Well you can, but keep in mind, anything you use the money on should earn more than the interest you’re paying. This is not a fund used for purchasing liabilities or consumer spending.
Lastly, you sacrifice a little bit of liquidity the first few years to build your own banking system long term. However, those that understand wealth understand that liquidity doesn’t build wealth. Those assets that are the most powerful wealth building assets are illiquid (real estate and small businesses).
If you would like to learn more about how you can use life insurance as a savings vehicle, reach out to my team and I. On average, with our program we are able to help clients save $100,000 or more tax-free in the 1st 12 months of working with them. That’s the power of the Wealth DynamX Sacred account! Click here to get started.
Own Your Potential,
Jerry Fetta
Grant Cardone Certified Coach
Jerry Fetta helps his clients build wealth so that they can eradicate poverty in their own lives and own their potential.
He believes scarcity and abundance cannot co-exist and that the way to end poverty is to help you build wealth.
You were not created to spend 40+ hours per week serving the 40-year-to-life sentence trading your precious time for money just to live in mediocrity.
However, the truth is that time and money must be exchanged. It just doesn’t need to be you making the exchange.
Jerry helps his clients create wealth that exchanges time and money on their behalf. The only way to do this is to make more money, keep it, and then multiply it.
He has helped clients double their income, save $100,000 tax-free, and secure 8-12% fixed annual returns on their assets.
To get started, go to www.WealthDynamX.com/contact
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