Using a Home Equity Line of Credit (HELOC) to manage cash flow just became a precarious undertaking because Wells Fargo Home Lending will no longer accept applications for Home Equity Lines of Credits. Of course, other banks are following Wells Fargo’s lead.
A HELOC or Personal Line of Credit (PLOC) is the essential back bone of the Velocity Banking model for cash flow management. Velocity Banking depends on the cash flow provided by a HELOC or PLOC to capitalize your current expenditures. Be that as it may, banks are also shutting down all their Personal Lines of Credit, making the practicality of Velocity Banking impossible.
But Velocity Banking always was a less-than-desirable way to manage debt and cash flow. Even though cash flow was increased, the interest paid on the HELOC or PLOC was always paid to the bank that issued the loan NOT to an entity which was sharing their profits with those who were borrowing the money.
Years ago, Nelson Nash showed how the dividends earned in Participating Whole Life Insurance (PWLI) can offset, and overtime, overcome the interest cost associated with financing. That is because PWLI dividends can become quite significant. For example, a PWLI policy issued on a 2-year-old child with an annual premium of $2,000 paid only through year 19 (age 21) can produce over $680,000 of cash value by year 80. This averages out to be greater than a 4.842% annual rate return on the initial $38,000 of premium payments.
As the S & P only returned an average of 7.392% over the last 61 years, this tax free, no fee growth of 4.842% over 61 years is remarkable as 2% for taxes and 1% for fees and the S & P returns provide only $522,979 which is 23.091% less the PWLI but with ZERO death benefit.
This policy cash value growth will occur even if the policyholder chooses to borrow from the growing cash values over those 61 years to finance other purchases or investments. Furthermore, nobody can legally stop the policyholder from taking such loans like Wells Fargo and other banks are doing today with their HELOCs and PLOCs.
And here is another important factor. The interest the insurance company collects from lending their money to policyholders increases their bottom line, which in turn increases the profitability of the insurance company. As profits are a determining factor in the dividend rate which the insurance company pays to their policyholders, this becomes a monetary gain for policyholders, just like Nelson Nash outlined in his book Becoming Your Own Banker.
Thus, using PWLI to velocitize money instead of a HELOC or PLOC, prevents the interest cost which these traditional loans must render to the banks. It also provides guaranteed growth PLUS dividends which can add up significantly over a lifetime. Because policy loans are a contractual guarantee, there will always be an option for policyholder to exercise, which means there will never be a time when a policyholder is told they cannot borrow against the existing cash value in their policy.
One of the characteristics of a wise person is they learn quickly. They see something which is profitable and pursue it with speed and vigor. Wise people don’t persist in doing things the way everybody else is doing them simply because that is the way everybody is doing it. They analyze what others are doing and avoid what is causing other people to cripple or destroy themselves. Interest paid, without a way to redeem that cost, will destroy wealth.
Learning to use PWLI as a financial tool, not just as a death benefit, is contrarian. It goes against the grain of what everybody else is doing. But the important message is, using PWLI is profitable and will build sustainable wealth for those who diligently use it to keep the interest they would normally lose or pay to others.
Dr. Tomas P. McFie
Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. Tom McFie is the founder of Life Benefits which helps people keep more of the money they make, so they can have financial peace of mind. His latest book, How to Build Sustainable Wealth, can be purchased here.