- Net 5–6% Return – we will walk you through this later
- Tax-Free – we are basically using a loophole in the tax code that does not tax life insurance
- Safe / Predictable
- Loan Provision
- Death Benefit / LTC
- 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.
- Purpose statement: Wealth Formula Banking is how cash flow investors enhance the investing they already are or will be doing
- Net 5–6% Return
- Safe / Predictable
- Loan Provision
- Death Benefit / LTC
- Same dollar creates value in 2 ways
- Simple vs. compound
- Replace the bank
- Opportunity fund
- Same dollar creates value in 2 ways
- Higher return
- Real life example: WFB vs. Bank
• 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…)
- Max income w/ least dollars
- Alternative for retirement plans
- Great for groups
- Concept Structure
- $100k for 1 property?
- No. $100k for 4 properties
- Do the work of $400k
- Years 1-5: Policyholder and bank contribute
- Years 6-10: bank only
- Ratio: 25% policyholder, 75% bank
- No collateral needed beyond policy
- Product: Indexed Universal Life
- Use an index
- Capture 80% of upside
- No downside
- Policy structure: max cash growth/min costs
- Use an index
- A Look at the Numbers
- $1M total going in
- $50k from policyholder / $50k from bank
- Then bank takes over total
- @ year 15—pay off bank loan
- Age 65-90—tax-free income of $115k/yr
- $250k goes in, total of $3M comes out!
- How it Works—Leverage Throughout
- Spread—growth vs. loan interest
- Leverage the bank for 15 years
- Pay off bank loan using policy loan
- Leverage Throughout—A Snapshot
- Example numbers at year 15 after we pay off bank loan
- Total Cash Value: $1.8M
- Loan Balance: $1.2M
- Net Cash Value: $600k
- Let’s say we get a 10% credit the next year:
- $180k (calculated from Total Cash Value)
- Loan grows by 5%–$60k
- Growth in Net Cash Value–$120k
- That’s a 20% gain on our net equity
- Overall return is 18%!
- Estate planning
- 2 Primary Risks
- High Interest Rates
- Poor Performance
- “Stress Testing”
- 80’s interest rates–$98k/yr income
- Great Depression–$78k/yr income
- Baseline income was $115k/yr
We are not talking about your father’s whole life insuranceWhole 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 productYou 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 ManualAssuming 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 LoanYou 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 LoanI 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:
- $64,510.01 to the Loan balance (pay off loan then…)
- $15,074.91 to the Annual Premium
- Any excess to be paid to overfund my account
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:
- $64,510.01 to the expire Loan balance (pay off loan then…)
- Any excess to be paid to the $15,074.91 to the Annual Premium
Flex paid off riderIn 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?
Private Placement Life Insurance (PPLI)It’s basically a variable universal life offered by some banks and insurance companies. The one thing you CAN’T do is invest with it however you want. Although you can customize the “subaccounts” you invest in, you CANNOT do your investments through that policy. You have to use hedge funds or mutual funds (known as subaccounts when used in insurance policies). It’s just a VUL on steroids. But you wouldn’t want to borrow money from it while those accounts go up or down with the markets. So think of it as a 401K where you are stuck with the bad investment options.
FAQWait I’m still super confused?!? How do I optimize it? It took me a long time to understand myself and it really helps to have a few people around you to talk you through it (other than the insurance sales person). That is what our Mastermind is for. You just want to make sure you are customizing whole life insurance for the three “levers”.
Spreadsheets!Play with the numbers yourself Are you convinced let me know if you need a referral.
Process of Applying for a Policy (2020)
Day One: Called my guy and completed an application in the online portal. Had a short discussion on how much I was looking to put in per year and how long of a time horizon. This is where it is critical to have a peer network around you to bounce these ideas. You want to know how much you are putting into these policies and how to configure it before you talk to the sales guy.
Day Three: The process took about 15 minutes. I had to answer some basic health/lifestyle question and some more specific questions like when I went to the doctor last and what was it for and did I have any pre-existing calculations.
Good questions to ask so you are on the same page with your IBC broker:
- % rate the CV grows.
- % rate I pay on loans
- And help me understand how much % rate the outstanding loan amount grows or if it does… this part always confuses me and I heard that it is different in every policy.
- 4) What is the minimum I need to put into the account every year. And how much I need to put to not lose my ability to over fund?
- And just verifying that the max is 250k a year?
- Historically, does the increase in loan rate coincide with increase in dividends and vice versa?Not sure if all IBC companies are the same but per Chris regarding Penn, “Both the dividend rate and loan rates can change each calendar year. In Penn Mutual’s case, they paid 6.34% for about 12 years in a row (longest of any company without decreasing), and then decreased a few years ago to 6.1%. The loan rate has remained at 5% that entire time. If the dividend rate significantly increases or decreases, the loan rate follows suit.
- The %rate the CV grows when there is a loan vs when there isn’t a loan
- Can you still overfund after year 5, and, if so, how much?
Physical exam and interview tips: