SPC Guide: Banking from Yourself & Leveraging/Hedging Stocks

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“Whenever you find yourself on the side of the majority, it is time to pause and reflect” -Mark Twain

Banking from yourself (with life insurance as the mechanism) allows cash flow investors to augment the investing they already are or will be doing.

Benefits:

  1. Net 5–6% Return – we will walk you through this later
  2. Tax-Free – we are basically using a loophole in the tax code that does not tax life insurance
  3. Safe / Predictable
  4. Liquidity
  5. Loan Provision
  6. Death Benefit / LTC

In Other Words:

  • Tax – Free growth on my earnings.
  • Steady, consistent, year after year “upside only” accumulation, somewhere between 5% and 7%. No home runs, just single after single, each and every year.
  • To make certain that any gains I earned will be locked away and not subject to market downturns.
  • To allow me to borrow money personally without interest, without a payment schedule (I would want repayment optional), and without affecting my credit score. 
  • To allow me to lend money to my family members at the preferred rates I designate. 
  • To transfer to my spouse, children, grandchildren or my favourite charity without taxation on the gains and without the expense of probate.
  • To be creditor – proof, protected from frivolous lawsuits.
  •  To not have required distributions, like an IRA. If a withdrawal is taken I want it to be my decision and not the government’s. I don’t want them to ever tell me when, how much or how often.
  • To be backed by the strongest financial companies in the world. Stable companies that are over 100 years old.
  • To carry my personal family name, like the Phillips Family bank. 

If you want the insurance death benefit and/or would like to use the banking strategy, the best bet would probably be to get a new policy that designed for that purpose and dramatically reduced cost..

If you don’t really care about using the banking strategy then just cash out and walk away with no issue..

 

In 2016, I learned this little known financial hack utilized by the smart money.

By being your own bank and using the Infinite Banking Concept you can create a dividend-paying whole life insurance. Its called life insurance but its just a tax code loophole to make a tax free yield in an account that is sheltered from lawsuits and creditors.

Add this to the list of things your typical financial advisor or life insurance sales guys just does not get… likely because they are still working for a paycheck and it actually decreases their commissions.

“Infinite banking” is just one term for this. The magic of the infinite banking concept is to create tax free “wash loans”. Where the dividend rate on the cash value is equal or greater than the interest rate on the loan and maximizing the use of Paid Up Additions, which have a lower commission rate than the regular policy – this is why most FPs don’t like this.

And for you high-net-worth folks still dabbling in paper assets, you won’t want to miss this other trick that I will reveal on there too – Email me for this info.

This is a part of my 1-2 punch to avoiding liquidity anxiety and having an Opportunity Fund to go after deals as they come up. I call this my “on-deck circle” cause I don’t like how the term… “dry-powder” sounds. More info. (Also has the latest info on the latest 2018 AHP fund in the first half of the webinar)

I think starting a small policy with 25% of your household’s annual cashflow is a good idea to start today… even if for the asset protection the policy provides (even in bankruptcy).About half the states protect the whole life insurance policies payable to spouse or children with partial protection in all states. Plus these assets do not appear on your kids FAFSA. So if you are like me and want to load your kids up with student debt (to get a BA in pottery or psychology) and ensure your golden retirement for numrouno (you) this is a good strategy.

For a warm intro to the guys I recommend email me at Lane@SimplePassiveCashflow.com
This is a part of my 1-2 punch to avoiding liquidity anxiety and having an Opportunity Fund to go after deals as they come up. More info.

Wealth Formula Banking w/ Lane Kawaoka Outline

Downloadable excel example

  1. Purpose statement: Wealth Formula Banking is how cash flow investors enhance the investing they already are or will be doing
  2. Vehicle:
    1. Net 5–6% Return
    2. Tax-Free
    3. Safe / Predictable
    4. Liquid
    5. Loan Provision
    6. Death Benefit / LTC
  3. Strategy:
    1. Same dollar creates value in 2 ways
      1. Simple vs. compound
    2. Replace the bank
      1. Opportunity fund
      2. Safety
  • Liquidity
  1. Higher return
  1. Real life example: WFB vs. Bank

 

Next up is this method of hedging yourself to a 0% loss. So if the stock market goes down 10-20% in one year you lost 0% 😁

Unfortunately, by taking this type of deal (that the rich do) you cap your upside at 12%. So if the market goes up 14% you only get 12%.

Here is where the strategy comes together… We leverage your investment by using 3X leverage. So if the market goes up 7% you get 21%. In that case, where the market goes up 14% you only get 12% you actually get 36%.

I know it sounds crazy. It’s like bowling with the bumper rails in place.

Highlights:

Growth—Expect to net a 5-6% return. This comes from a gross interest credit of 4% guaranteed, along with a long history of paying dividends that are currently paying an additional 2-3%.

Loan Provision— Policies carry a unique guaranteed loan provision that makes it possible to use core wealth building principles such as leverage, velocity, and cash flow to maximize the way your money works for you. Because money on a loan comes from the general account of the insurance company, NOT directly from the cash value, we can create value in more than one place at the same time.

Safety—100% safe from market volatility and guaranteed to grow. These Mutual Life insurance companies we represent have been paying dividends for more than 150 years. This includes times like the Great Depression, World Wars, and a myriad of different market cycles.

Liquidity—Unlike having money in a qualified plan such as an IRA or 401K, money is accessible at any time without the worry of a 10% IRS tax penalty. Liquidity can be the difference between capturing an opportunity or letting it slip away.

Tax-Free Growth— Money grows and comes out on a tax-free basis, and unlike a Roth IRA, there are no contribution or income limits.

Death Benefit—Since we are using a dividend-paying whole life insurance, there’s always a 100% tax-free death benefit. Although we’re primarily focused on the living benefits and cash growth, this is a significant benefit. It’s insurance we don’t have to pay for in any other way.

Long-term Care Coverage— Provides for an efficient way to plan for the ever-increasing expenses associated with long-term care. By utilizing the accelerated death benefit rider (no additional cost), you can utilize a portion of the tax-free death benefit to cover long-term care costs.

 

Velocity Plus w/ Lane Kawaoka Webinar Outline (More to come…)

  1. Purpose
    1. Leverage
    2. Max income w/ least dollars
    3. Alternative for retirement plans
    4. Great for groups
  2. Concept Structure
    1. Leverage
      1. $100k for 1 property?
      2. No. $100k for 4 properties
  • Do the work of $400k
  1. Years 1-5: Policyholder and bank contribute
  2. Years 6-10: bank only
  3. Ratio: 25% policyholder, 75% bank
  4. No collateral needed beyond policy
  1. Product: Indexed Universal Life
    1. Use an index
      1. Cap
      2. Floor
    2. Capture 80% of upside
    3. No downside
    4. Policy structure: max cash growth/min costs
  2. A Look at the Numbers
    1. 46-yr-old
    2. $1M total going in
      1. $50k from policyholder / $50k from bank
      2. Then bank takes over total
    3. @ year 15—pay off bank loan
    4. Age 65-90—tax-free income of $115k/yr
    5. $250k goes in, total of $3M comes out!
  3. How it Works—Leverage Throughout
    1. Spread—growth vs. loan interest
    2. Leverage the bank for 15 years
    3. Pay off bank loan using policy loan
  4. Leverage Throughout—A Snapshot
    1. Example numbers at year 15 after we pay off bank loan
    2. Figures:
      1. Total Cash Value: $1.8M
      2. Loan Balance: $1.2M
  • Net Cash Value: $600k
  1. Let’s say we get a 10% credit the next year:
    1. $180k (calculated from Total Cash Value)
    2. Loan grows by 5%–$60k
  • Growth in Net Cash Value–$120k
  1. That’s a 20% gain on our net equity
  1. Overall return is 18%!
  2. Estate planning
  1. 2 Primary Risks
    1. High Interest Rates
    2. Poor Performance
    3. “Stress Testing”
      1. 80’s interest rates–$98k/yr income
      2. Great Depression–$78k/yr income
    4. Baseline income was $115k/yr

Past resources:

We are not talking about your father’s whole life insurance

Whole life insurance is only one part of the above strategy. below is a discussion on my thoughts on the product as it stands alone.

First off, its a product which you pay for. The providers (insurance companies) are using the best minds and big data to price out your coverage premiums which include marketing, sales commission to your FP, and a wee bit of profit for their company.

In most cases, if you die while owning life insurance, you get paid the death benefit, tax-free because of the step-up in basis at death

Term life insurance gets really expensive after the term ends and as you get older (cause its price by the chance of you dying).

Whole life insurance is designed to pay out when you die so you can see how its sort of like a bank account. The way we are using this policy is taking loans against it.

Note – A Guaranteed Universal Life policy if a flat death benefit where the Whole Life grows.

These policies allow you to accrue interest on the amount of cash value that is not being “borrowed out” of (technically borrowed against) the policy. People in the industry call this “direct recognition.” Just be aware that “non-direct recognition” pay dividends as though no money was borrowed against the policy. Just something to ask when setting up your policy.

Downsides of the Whole Life product

You are front-loading your costs and fees. This can be devastating for someone in the early stages of wealth building. (Almost as bad idea as paying off low-interest student debt or mortgages before investing)

I like the ability to use this vehicle as a means to bank from yourself but keep in mind that you should not need insurance you don’t need.

I think you should ensure well against true financial catastrophes and self-insure against everything else. Yet I ensure my iPhone because I am weird like that… actually, I justify it that I would search the world wasting my time for two weeks before going buying a new device. So insurance for a phone would save me time since I would not hesitate to give up looking and put in a claim.

Returns are typically low (when compared what we do in real estate investing). So just getting a policy alone and not implementing the “wash loans” does not make sense.

Most times the commisions are maximized by the FP. This can get complicated on how to design this stuff so its an ideal situation for a greedy FP to pull one on you. By maximizing the use of “paid up additions” while minimizing the amount of “regular policy” you can decrease the commissions and still execute this strategy.

Other pitfalls:

80%+ of whole life policies are surrendered prior to death because their beneficiaries need to money beforehand. Perhaps on an ALF (even though some policies have this benefit).

It’s slightly more expensive for older people and smokers to get ensured however I have found it to be negligible (1-3K difference on a 50k premium) between a 30-year-old non-smoker and a 50-year-old non-smoker.

Smaller policies like for your kids have much more fees because the setup fees fit into the policy. So buying a $20K policy for junior who does not smoke might not be the best idea.

Users Manual

Assuming you got yourself set up with one of these sweet arrangements (if you need a warn referral let me know) the following is some nuances I found by using my own policy. This is a part of my 1-2 punch to avoiding liquidity anxiety and having an Opportunity Fund to go after deals as they come up. More info.

Withdrawing money via Loan

You can take money out of your Cash Value portion. When I contributed to my policy I got 70% of what I put in as Cash Value on day one to be able to take out as a loan. This I could use for deals or whatever I wanted. This is super simple as you can go online or call into your provider and tell them “you want to take a loan from you Cash Value”. Simple they send you a check or ACH transfer and usually takes about a week.

Replenishing money to payback you Loan

I am actually writing this to myself as it’s a little tricky and this way I remember the steps.

I print out a simple letter (examples below) and mail with my check to my friends at Ameritas.

Example 1:

7/14/18

Dear Ameritas,

My name is Lane Kawaoka (######).

I have enclosed a payment for $60,000.

Due to my flex rider please apply my payment in the following order:

  1. $64,510.01 to the Loan balance (pay off loan then…)
  2. $15,074.91 to the Annual Premium
  3. Any excess to be paid to overfund my account

In addition, please switch my premium billing to an annual basis and remove my automatic billing per month.

Please advise when the next bill will take place via email.

 

Example 2:

5/1/18

Dear Ameritas,

My name is Lane Kawaoka (######).

I have enclosed a payment for $65,000.

Due to my flex rider please apply my payment in the following order:

  1. $64,510.01 to the expire Loan balance (pay off loan then…)
  2. Any excess to be paid to the $15,074.91 to the Annual Premium

Please advise when the next bill will take place via email.

Flex paid off rider

In whole life policies, you have this add-on where you are allowed to add paid up additions (purchasing larger death payout and cash value). In my policy, I need to put in at least 70% of $35,000 once every three years. Note – there are other types of these riders where the requirement is to put a more consistent amount every year but personally prefer the 1 out of three-year arrangement because my business income fluctuates so much.

Without penalty, I can go over 120% or $42,000 every year as my max. If I want to put in more I would have to make a new policy and get another physical. This limits the risk for the insurance company if you are putting away infinite amounts of cash after deciding to pick up the hobby of skydiving while smoking 2 packs of cancer sticks a day.

I’ve been burned before with Life Insurance that was sold to me by a 24-year-old out of college salesperson and everyone says whole life insurance is a scam. What can I do with my old policy?

Have no fear my friend you basically have three options:

  • Cash it out and just walk away with the cash that’s in it.. In that case you obviously no longer have a life insurance policy so the death benefit goes away.. Because of the way it was designed, it possible does not have enough built in cash value yet for there to be any tax consequence so you don’t have to work about that..
  • Borrow against this policy and use the money that way.. You can use it as a properly design self-banking instrument, the downside being that the it’s not a great cash building policy so there’s more cost in it than what you’d like to see and the loan rate may not be real favorable.
  • Open a new policy (one that is designed for cash build up) and do a 1035 exchange into and this time get a policy optimized for banking.. The nice thing here is that there would be little cash right up front to boost the new policy because we are using the old one.. The downside is just going through the process of getting a new policy with physical evaluation etc..

Index Universal Life (IUL) Caps: Will They Rise When Interest Rates Rise?

Normally when we are taking about a banking policy we are talking about a wholelife product however sometime an indexed universal life (IUL) is preferred which is why it makes sense to work with only people you (we) trust. The cap defines the upper limit of the policy cash value crediting rate.

Typically (2014-2019) IUL caps have gradually fallen, leading some to wonder what would stop carriers from gradually dropping caps to the policy’s minimum guarantees. This concern is particularly common when the client is considering whole life as an alternative because whole life discussions begin with guaranteed performance enhanced by dividends. Legally this is possible, and advisors may need some clarity to make a decision.

So, how valid and relevant is the concern that caps may fall to the level of policy guarantees?

Cap levels are essentially driven by the amount of money the carrier has available to purchase long options in support of its IUL book of business. While option pricing is a combined function of option budget, market volatility, and the price of zero-risk products, data indicates it is the option budget that is by far the overriding driver. This is particularly true when considered over the medium to long term.

It’s indisputable that the reason whole life dividends, universal life declared rates, and IUL caps have fallen over the last 20 years is the declining interest rate environment. As rates fall, the general account return must also fall because its portfolio is comprised of primarily fixed income investments. When rates rise, bond returns in the general account will increase slowly as the life insurance carrier replaces maturing bonds and adds additional bonds with new premium. The question is this: will the carrier keep the extra return instead of passing it on to the end client in the form of higher caps, dividends, or declared rates?

The life insurance carrier would say that they take their profit in the form of money management fees, costs of insurance, and policy charges; thus regarding the improved yields as policy owner money. On the other hand, cynics would disagree and say the life insurance carrier will pocket the increased yield.

Let’s assume for the moment the cynics are correct, and that carriers have no regard for policyholders and deal only in their own self-interest. Well then, is carrier self-interest positively served by such behavior? The answer is no. And here’s why.

IUL products are mostly sold to clients below the age of 65 who will live for a long amount of time. If interest rates rise but caps do not, then an IUL product becomes less attractive compared to similar products issued by competitors with higher caps and higher client yields. Healthy clients, encouraged by agents and other advisors, will surrender their policy so that they can move to the more competitive products. Furthermore, this would create another problem for the original carrier because the remaining pool would be the unhealthy, and this would result in more early death claims and therefore further losses.

Will the original life carrier care about these lapses? After all, they won’t be paying a death claim and have already booked profit, as we noted above. The answer is yes.

One of the great advantages of life insurance is that as standard practice the carriers guarantee the mark-to- market value of the bonds that support the cash surrender value. This was not an issue in a declining rate environment because the carrier could sell the attractive higher-yielding bonds and pocket the gain. However, when rates are rising and especially if the rise is rapid, the reverse is true. Thus, clients induced to surrender by higher caps elsewhere create a significant mark-to-market liquidation loss for the short-sighted carrier.

For example, if the insurer has a general account with an average bond maturity of ten years (typical for the industry) the losses would be a 9% loss on the cash value surrendered if there was a 1% increase in underlying market interest rates, and a 35% loss if there was a 5% increase. For a single client this is unpleasant but unlikely to break the carrier. However, if it happens on a large scale it creates an enormous loss that no senior management team is likely to survive.

Given the potential for considerable losses and that the carrier hits its profit objectives by passing through the increase in general account yield, the carrier is incented to pass through improved yields to the client in the form of higher caps. By doing so, the carrier attracts more premium while simultaneously protecting prior profits. By not doing so, the carrier risks mass surrenders which could result in the loss of hundreds of millions of dollars.

No one knows when interest rates will rise, but data and logic tell us that the life carriers will protect their profits. To do that they must pass on improved yields to the client in the form of increased caps and/or improved participation rates.

More IUL info to put you to sleep (just get a pro to work with that you trust not to stuff you in the high commission plan).

 

Spreadsheets!

Play with the numbers yourself

Are you convinced let me know if you need a referral.

 

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