How Does Wealth Creation Banking Life Insurance Work?
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I want to address the topic of saving money in a Wealth Creation Banking Life Insurance policy. This is something I do personally and highly recommend doing when talking to my clients. In fact, I own a life insurance brokerage and can establish and setup these types of policies for my clients. It is ironically, such an out of the box concept, even though it is almost 200 years old. I am often asked how it works. I’ve explain the strategy, but now I want to explain the tactical side of how to use this and design it for the more technical individuals out there.
First, this conversation doesn’t matter if you aren’t saving money. For someone who wants to know the ins and outs of how a policy works, but you don’t even save any of your income, you’re putting the cart before the horse. When working with clients, my minimum requirement is $500/mo being saved. If you can’t do that, there are some basic things that need to be addressed first.
So let’s dive into it!
First we need to select the right concept to save with. We want growth, we want liquidity, we want guarantees, we want to avoid taxes, we want leverage, and we want to leave behind more than we started with. Those are the qualities of an ideal savings account. Life insurance provides them all. Banks, retirement plans, and most other investments do not. Conceptually, life insurance meets all the criteria of a great savings plan. If you understand the purpose behind saving money, you’ll understand why life insurance is a great idea.
Next we need to select the right type of life insurance. We want a specific kind: Whole Life Insurance. The reason why is the cost of insurance is fixed, and doesn’t expire during the life of the policy. This is important. Unlike term, which expires, and universal life, which increases in cost. Imagine saving in a bank account that expired in the middle of your life or one that had continually increasing costs every single year. Whole life insurance is the base policy that we will use for this.
We also need to select the right company. We want a mutual life insurance company. Mutual means they treat their policy holders as share holders by paying a dividend based on the profitability of the company. This means when profitability is exceeded, you share in the financial success of the company. We also want companies that are 100 years old or beyond. This shows longevity and strength. With a 100 year old company, you can look at how they performed during economic depressions and recessions and know that the company stood strong or fell apart.
You also preferably want a non-direct recognition life insurance company. This basically means that the company doesn’t reduce it’s dividend payout to you if you take out a loan. The other option is called direct recognition, which means when you borrow money, the company reduces your dividend on the outstanding balance. You can make it work either way, but I prefer non-direct recognition myself.
Now let’s jump into the structuring of the policy. We have a whole life insurance policy with a mutual insurer that is at least 100 years old. Now what? Well based on the funding goals we have, we would select a funding amount and funding period. Let’s say we are saving $1500/mo for the next 20 years, just for the sake of example. You’d choose a policy with a 20 year funding period and structure it so that it has high early cash value. This means that the cost of insurance is held very low so that the maximum amount of money possible can be saved in to the cash value to be used.
The way this is accomplished is by a few different means. First you need to select a low base premium for your whole life insurance death benefit. The base premium isn’t all bad, but it doesn’t need to be high. You also don’t want to cut it out entirely because the base premium is what represents your ownership in the company and is where the dividend comes from. With no base premium, there is no dividend. We usually want the base premium to be 20–30% or less of the total premium contribution.
The next component is called a paid up additions rider. This rider allows the policy to funnel more money to the cash value. Again, the cash value is the portion of the policy that allows you to save money in it for future use. Most of your premiums should go into the paid up additions rider. This gives you nice, high early cash values.
The final component is a term insurance rider. This artificially inflates the death benefit to prevent the policy from becoming taxable. That’s right, these polices are so effective for sheltering money from taxes that the IRS attempts to limit how much you can put into it. The way around their imposed limit is by making the death benefit higher than usual with a term insurance rider.
The result? When you put your $1000/mo into the policy, about $300 of it purchases insurance, and about $700 of it goes directly into your cash value. You will earn a 6–8% gross dividend and net 4–6% of that after your policy costs are covered. If you qualify, you can sometimes get up to $950/mo of your $1000 contribution available and liquid immediately.
What about when it comes time to access the money? Well, you borrow against it. That’s right! Instead of withdrawing the money which would stop your growth and in some cases incur taxes, you would just borrow against the account.
Let’s say for example, you’ve been saving for a few years and you have $100,000 in your account. Instead of accessing your $100,000, you’d tell the insurance company you want to borrow $100,000 from them instead. They’d lend it to you at a 4–5% interest only rate. The interest is due only once per year and you can pay back your principal on your own terms.
You may be wondering why you’d want to pay interest to borrow your own money right? Well don’t forget something key here: because you borrowed, your actual money never left your account which means it is still growing. You’re growing at 6% and borrowing at 5%. That means you’re being paid 1% to use your own money. Now if you did pay your loan off early, you’d be able to increase your 1% to possibly a 2–3% interest rate spread to use your own money because you would be reducing the principal.
Let’s look at that from another angle. Imagine putting money in your bank, and upon withdrawing it, they continue paying you the interest like you’d never taken it out. That’s what your life insurance policy does.
One more note on the interest rate. You are paying interest, but it is being paid to a company you have an ownership stake in. This is in your favor. Also, if you use the policy for qualified business purchases, you can also deduct the interest off on your taxes and have Uncle Sam cover it.
Often times we use these initially to help clients pay off debt, invest in their businesses, and ultimately to borrow against to invest in.
I hope that gives your some great information on Wealth Creation Banking and how it works!
If you’d like to learn more, click here to reach out to my team.
Own Your Potential,
Jerry Fetta
Grant Cardone Certified Coach
Jerry Fetta helps his clients gain more financial knowledge, make more money, keep more of it, and multiply what they keep.
If you feel like one or more of these areas is costing you money and opportunity right now, then get more information about Jerry Fetta and Wealth DynamX by going to www.WealthDynamX.com/contact
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