Insight on Real Estate Investing and The Perpetual Wealth Code™ with a “lump sum” of money versus an income stream. Discover why balancing life insurance with other investment opportunities is more important than trying to get the max $ into life insurance premiums immediately.
Tom: Welcome to Wealth Talks, where we talk about solutions, money and other things that create wealth in your life, it’s good to be back here sitting behind this, well it’s not a golden mic like Rush Limbaugh’s but its black, and it’s got a little blue dot on it, telling us we are recording, John, it’s good to be here with you.
John: Yes! It’s a great, great day.
Tom: It is and you know, this is kind of going to be an, maybe an advanced topic, and if people haven’t been listening to the podcast or don’t actually own a whole life insurance and are already participating in the perpetual wealth code with those cash values, we just encourage you to go back and listen to earlier podcasts so that this isn’t over whelming information. But ultimately when we want to make the perpetual wealth code really be perpetual in our life, we have to come to the realization that we have to think both. We have to realize that the Life Insurance isn’t the end all of everything, it’s a big part of the end all that we are looking for but it can’t be all of it. Otherwise we are going to leave money on the table, we are going to leave opportunity on the table and we are not going to be the best stewards that we could have been, and so this is a topic about thinking both and specifically thinking both about life insurance and real estate.
You know, many people they want to invest in real estate, real estates are great investment if you know what you’re doing. Some people want to invest in the stock market, and the stock market can be very rewarding for people who know what they’re doing.
You know, Warren Buffet says that diversification is for people who don’t know what they are doing because then you get little bit of everything and possibly cover the losses of what you don’t know, and that’s true but if know something very well then it can be a golden opportunity for you, and what we know very, very well in this business is life insurance how to use it and leverage it so that you can have those other opportunities and whatever it is that you want to invest in to make money grow in your life.
John: Yes! And you know I was talking to a gentleman the other day who was saying, “I don’t have an income right now but I have a lump sum of money that I’m sitting on, and I’m going to be investing in real estate and I’ll be getting an income again soon“, and so as he was thinking about using the policies and putting the perpetual wealth code to work in his life. He didn’t have an active income with which he could apply the 10-20-70 rule and so he, we were talking a little bit about the options when you have a lump sum of money that you’re working with, and this example came that I shared in a wealth summit a couple of years back about a lump sum that is being used for investing in real estate
Tom: You know, when you say a lump sum, my mind jumps to the insurance illustrations that I’ve looked at, where other agents have taken a lump sum like this and crammed it into a life insurance policy by adding a huge term writer so that it avoids the IRS neckline and to me that’s just a disservice to the client, if the client knows how they could use that money otherwise.
John: There you go because if they, if you’re just going to let the money sit certainly by putting into a policy it will grow faster if you just letting it sit over that time, but if you have to borrow that money back out and pay policy loan interest while you’re making investment, there’s a more effective way to do both here.
Tom: It is, absolutely, I was just working with a client last night that’s got you know, yeah $100,000 he wants to cram into a policy so he can borrow money back out to loan to his business. Oh forget, forget that, loan to your business, make your business grow and use the growth from your business to fund that insurance policy. That makes so much more sense, in the long run the growth is going to be exponentially different.
John: Yes and its more sustainable.
Tom: Much more sustainable.
John: And so taking one, 1.5 million dollars of capital which is this real estate example that we’re looking at, and we just took $100,000 of that for insurance premium because we wanted to leave enough for a number of real estate investments that we were looking at here, there was a hundred and forty two thousand dollar investment that came off just a few months into the project, three hundred and sixty thousand dollar investment a few more months into the project, and we had a total of I think it was five or six different investments over the course of next 10 years.
Tom: And those early investments would have been completely lost had he put all that money on a life insurance policy. And the revenue that was generated from him would have been gone, never seen again.
John: Yes! And so, one of the things that you have to look at when you’re using lump sum and somebody knows what they can use the money for, is we don’t want to tie up too much of that in life insurance so you don’t lose that opportunity that you’re talking about. But we want to put enough in the life insurance because there’s not always the opportunities. Often times when you have a lump sum like this sitting around, there’s going to be some money sitting around at any given time, and that’s what we’re trying to maximize here. We want to put that into life insurance so it is growing…
Tom: And we get the compound interest.
John: …while it’s put sitting around, and we’re getting the both. So we’re saving while we’re getting the growth on it, and that’s what we are trying to maximize.
Tom: Plus, we want the death benefit in case these investments do turn south.
Tom: That we’ve covered the loss, if there is a loss of, I mean, life insurance is a liability coverage, the number one thing that’s what it is, and if we avoid looking at that and realize that, what if something happens to me, and I can’t manage this investment, does someone who’s going to inherit it know how to take care of it or are they going to lose money on it. Well the death benefit comes in and covers that.
John: Yes, so the example that we were looking at here, the capital that’s in the savings they deplete that amount in about 3 years with investments that they are doing. But they’ve now put enough money into the policies they haven’t tied up their whole liquidity.
Tom: So you’re putting money into a life insurance policy from this one and half million.
Tom: Plus you’re making these investment opportunities, and you’re saying that in about 3 years and a month or so they run out of the 1.5 million
John: The 1.5 million, but there’s another 300,000 now in policy cash values, now is the time to access those.
John: Okay and so they have it, this $ 940,000 investment that comes around right about your three, and so they could take the rest of what’s left in the savings, they could take a policy loan they make that investment, so didn’t limit their opportunity.
Tom: So with the policy loan and the rest of their 1.5 million they were able to make that investment in your three.
John: Yes, and so there is a slight liquidity difference between just a traditional savings and versus the policy, over specially over the first 10 years, because the policy is like starting a new business, you can almost call it a “investment” although we can’t call life insurance an investment that you’re making in order to maximize your savings that need to sit liquid.
Tom: Well Life insurance is an asset purchase, you are purchasing the death benefit.
Tom: And you get more and more equity in it as you go along and that’s the cash value that we were talking about.
John: That’s right. So as the investments then are paid back, then the policy loans can be paid back as well. We’ve just had the $100,000 premium go for the first 4 years on this policy and then the paid up additions rider dropped just like we write a normal life insurance policy that we design or to maximize cash value upfront and still keep the long term growth.
Tom: That makes me think of why we dropped that premium on most of our policies after 4 years, we just did a presentation yesterday that shows you can get that rate of return that you lose back again by starting another policy, with the difference between what you have been paying, but in this case that doesn’t apply but, that’s why we do that.
John: Right, and so for those of you who are following along with this, it might help if you go to podcasts.life-benefits.com and click on the resources page and you can download the resources for different podcasts that we do. You can download the spreadsheets that shows these investments laid out, and shows the capital balance, shows the policy loan column, we’re figuring policy loan interest on this example, 5 percent, but you can see how these numbers play out. Now over the first 10 years the liquidity is somewhat the same to a little bit less.
Tom: What do you mean by liquidity John?
John: Liquidity, so what we’re saying in there is the amount of money that’s available, that’s accessible at any one time.
Tom: It’s the same as, are you saying that it would be the same as if they bought the policy or didn’t.
John: So it would be if they didn’t buy the policy it would be what was in savings.
Tom: Sure, got it.
John: And, if they do buy the policy it’s what’s in savings plus what they could access in cash value.
Tom: Yes, so it really didn’t hurt them to buy the policy at this point.
John: No, it’s a little bit lower for the first 10 years, just like it would…
John: …because the policy hasn’t come ahead, considering premiums paid the cash value that’s available.
John: …there’s a little bit of a the difference, because it’s like starting a new business. The real benefit then comes after the ten year period, we just go up 10 years on this example, then there’s about sixty thousand dollar difference in favor of the life insurance method. You have sixty thousand more in savings, plus cash value than you just would have in savings alone. Same investments, same cash flow, it’s just where we were putting it.
Tom: That’s not a bad difference over a ten year span.
John: No, especially when you consider that you have a death benefit of 1 to 2.5 million dollars all during that period.
Tom: That’s correct,
John: It’s growing every year. So that’s a great thing, and on the resources, if you look at the real estate example one, go all the way down to the second to last page, you’ll see a graph of those values over the first 10 years.
On the next page then, you look out from 10 to 30 years, and this is where we start to see the growth happening, because now the life insurance policy is kicking off, and the liquidity that we have “sitting around” is growing in the life insurance. So now, not only does the death benefit grow from 2.5 million dollars to over 3.7 million over the next 20 years, but the cash values are also growing. So, if we could pair traditional to the policy and plus savings after 30 years, then there’s over a million dollars difference.
Tom: Yeah, over a million point three.
Tom: That’s incredible.
John: And that’s… and so you ask yourself was the slight difference in liquidity here in the first 10 years’ worth the huge difference in the later years.
Tom: Well, that’s why we talk about life insurance being like starting a business. A business model says that you put a lot of money in the first 7 to 8 years of a business, and you know that might be the education cost for you to get your degree to start a business if you’re going into a professional business, or it might be the equipment cost or the lease or the build out or whatever it is and you don’t even expect to be bringing in more money than what you’re putting into the business by year three or four. Somewhere around year three or four, you might break to the point where you’re going to generate as much money in the business as you’ve put into it that year and so…
John: It depends on the type of business too. Whether it’s more of a service based business or whether you have capital investments that you have to start.
Tom: But that’s a general business model, and so when we look out 8-9 years, if that business isn’t starting to turn a profit just like this here, this example that you gave here, is starting to turn a profit at that point, then we might be in the wrong business, okay? And that’s what this is showing. Anyone that starts a business needs to think about the end part of it. There is a saying that if you’re going to start a business, how do you get out of it? If you don’t know how to get out of it, you shouldn’t start it, and charts like this and statistics like you’ve put together here John show us the end results, the possible end results. It could be better than this, okay? And so, now we have a way to get out of this business if we need to. There is a, what if you sold the real estate at this time?
John: Well, the real estate deals in this example, they wait for the first 10 years…
Tom: They only wait for the first 10 years, okay.
John: Yes. And that’s the most critical time because you’re trying to add something to it while you have a high demand for capital. And so, we’ve shown this example, if that works out very nicely.
Tom: It does. Yes.
John: Same thing, it would be even better continuing on.
Tom: So, all it has to do with is changing the way we think and in winning your financial game, we talk about this explicitly because “you cannot put new wine into old wine skins”. You have… otherwise you’d ruin both the wine and the skin. The skin bursts, the wine pours out on the ground. So, what you have to do is we have to think differently than we’ve been trained to think. We have to think non-traditionally because this is a non-traditional way of creating wealth. Now, I say non-traditionally, it’s not so non-traditionally because corporations in America today according to Aon Hewitt are buying a billion dollars’ worth of life insurance a year. That’s the premium they’re paying for it, and of course we know that banks in America own 186 billion dollars, so what are they doing? They’re doing the same type of things with us because it isn’t traditional, it is something they understand but they don’t tell us that we can do it.
John: And here’s an advanced strategy, people who are just looking at this for the education as they are just getting into the… learning about the perpetual wealth code, you don’t have to understand the workings of this right now, but generally, it’s going to be better to split up the policy premium, we probably wouldn’t do one single policy for $100,000 in this case, we’ll probably split it up, do a few $50,000 policies because it gives more, even more flexibilities than just this one example. That goes to show too because when somebody… when an agent tries to put everything into one policy at the very front, very start, it ties up too much liquidity and it’s harder to get a policy loan so, let’s take this a step further. Right now, bank loan, the interest on bank loans is very, very low.
John: And so, why not use the banks money, and you could even use one of those policies as collateral for the bank loan if we need to, at a lower interest rate, that’s one advantage of having the two policies, or at least more than one. So, you don’t have to assign everything as collateral, you can assign just one.
Tom: You know, and we can’t talk about this example without thinking of the third factor and that’s the death benefit. You know, Liberty University in Virginia, Jerry Farwell, Google Jerry Farwell, listeners just take a moment and Google in look at what a legacy he built there. Jerry Farwell was really building real estate, he was building a church and a university, and to do that, he had to take on some debt. Debt’s not a dirty four letter word if you’re trying to expand and grow something. But he was intelligent enough to know, actually brilliant enough to know that someday, he was going to die. And so, he was very heavily insured and his death benefit after he built this huge university paid off the debt, $34 million.
Tom: And now, Liberty University has one of the strongest and the fastest growing endowments of most private universities. In fact is, the president just tabbed Jerry Farwell Junior to head up his educational counsel because of the brilliancy behind the construction building and the rise of Liberty University, and that would not have happened without a life insurance death benefit, and that’s so important to understand this. So, Jerry Farwell understood this both concept very well.
John: And the death benefit really is the multiplier factor in all of this
Tom: It is.
John: because all of the comparisons that we do just savings versus savings plus the cash value, all of that goes… it’s completely blown out of the water. Something unexpected happens and you die, and the death benefit just takes that to the next level, it leaves the legacy that you couldn’t build yourself.
Tom: Absolutely. So, you know this is like we said again, this is more of an advanced scenario, but it’s something that is very pertinent to anybody that comes into a lump sum of money and to realize that it’s not always in your best interest just to try to slam it into an insurance policy as soon as possible. That raises premiums in the future, regardless if someone puts a huge term rider on there to try to absorb that, you have to pay for the term rider, and it’s just often better to think of it differently. We’re talking about money management skills here, we’re not talking about how big of a life insurance premium can we sell.
Tom: Because when we look at money management skills, we want to keep your options on the table, develop those skills so that the opportunities for you in the future are greater than what they would be if we take those opportunities off the table today.
John: That’s right. So again, for those of you who want to get the resources for this podcast, go to podcast.life-benefits.com and click on the resources button, you can download the resources for this podcast and others that we upload.
Tom: Until next time when we talk about solutions money and other things that create wealth in your life, have a great week and we’ll be back next week.