Now we need to stretch our imaginations here and say what if there was an investment vehicle that had the following traits:
-A guaranteed interest rate?
-A variable dividend that got added to this guarantee and has been paid by some companies for over 100 continuous years? (Again, this is not constantly growing, but paid every year)
-Can access 90% of every dollar you put in at any time with a simple piece of paper?
-When structured properly, can be withdrawn tax free with no intention of ever paying it back and with no penalty?
-Protected from creditors and lawsuits (true in all but 2 states)?
-And finally, has a death benefit kicker?
There are different types of life insurance to purchase. Term insurance is exactly that - you are purchasing for a specified number of years (a term). Once that term is over, you are either alive and nothing got paid out, or you were one of the unlucky 1% who did die and your family received a death benefit. And that is the statistic: For every 100 term premiums an insurance company receives, it only pays out, on average, for 1 individual. It is cheap premiums (a healthy male in his 30s can get $1 million in coverage for about $700 for the YEAR) and is the bread and butter for life insurance companies. It is ESSENTIAL if you have a young family to have life insurance. If this is all you can afford to do, do this. It's better than not having any and your family having nothing if you pass.
The other broad category is permanent life insurance, which includes whole life and universal life.
Can a whole life policy be structured so that it has a minimal death benefit but we can stick a lot of cash into it to maximize the cash value and use the money while we are alive? The answer is yes. When properly structured, a whole life policy done in a "banking" way focuses less on the death benefit and gives you the opportunity to get to the cash within that policy.
Does it drive you crazy when you hear some CEO that was fired get a $15 million severance package? Where did the money come from? It was most likely from an insurance policy. The company goes to NY Life, in this example, and says we need an insurance policy on our CEO and we only want to pay the premium in full just once, and we want the death benefit to be $50 million. NY Life responds and says to the company that if they want $50 million dollars in death benefit, it will cost them a one-time fee of $18 million, and the company will have immediate access to the cash value of $15 million within the policy. This is known as a single premium policy. If the company does not need that money, it is earning interest on that cash value along with a possible dividend that compounds the cash value over time. These "single premium" policies are known as Paid-Up Additional riders for the policy that we purchase for ourselves (PUA for short).
There is one other key concept to understand. We just can't stuff this policy with excessive cash without the IRS starting to sniff around. There is a 7 pay-test to make sure this insurance policy remains as an insurance policy and does not turn into a Modified Endowment Contract, aka a MEC. If the policy becomes an MEC, you have lost all the flexibility and benefits this insurance policy can provide and have essentially created an annuity.
So think of a see-saw. You have this single premium whole life insurance policy on one side with all this cash value built in, and on the other side of the see saw is a term life insurance policy with $0 cash value (remember: if you pay in full for the term and you don't die, you get nothing). The teeter point is the MEC. We start on the term side, but get as close to that teeter point as possible WITHOUT crossing over.
How should one of these policies be structured to benefit you? Well let's use an example of a person in their early 30s. She makes $100,000/year, so the maximum amount of life insurance she can purchase is up to 25x her annual salary, or $2.5 million in death benefit. This should be structured to maximize the Cash Value of the policy, so we want to see lots of PUAs in the policy, but there has to be a minimum amount of a traditional whole life policy to support it. As I said earlier, the PUAs are the catalyst or the turbo. You can only put so much turbo on an engine of a Kia Rio. The engine of a Corvette, however, can handle much more turbo. The minimum ratio of whole life premiums: PUAs allowed should be at least 1:3 when done in favor for you, preferably higher.
(14K premiums: 45K PUAs, or 1: 3.1), which adds another $600,000 in death benefit, giving us $2.1 million in death benefit. What does this do starting Year 1? If this was a traditional whole life policy and the premium was $60,000, you would have about $1500 in cash value. That's it. By structuring it the infinite banking way, you have access to $44,000 of cash value, or almost 75% of what you just put in. And you have a $2.1 million dollar death benefit just in case something happened to you.
You have a choice in terms of trying to grow this cash value. This is supposed to be a very conservative part of our overall assets. I will make it easy and make sure this is a dividend-paying whole life policy. You do not want to be tied to the stock market directly as one can be with universal life. Though I called this the fixed income side of my portfolio, this is NOT something you put at risk. The dividend grows by compound interest, not simple interest. This dividend will become so large over time that it can pay your whole life premium without you putting in another penny into the policy. In fact, with our policy, our goal is to maximize the amount of money we can put in for the first 7 years and then leave it alone and let the dividends pay the premium. The other interesting thing to note is with a traditional whole life policy, the death benefit remains the EXACT same value. With an IB policy, as the cash value grows, the death benefit grows as well, so your loved ones will actually have more money from the death benefit in case you passed prematurely.
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