You see investment firms were a big part of the origination of government plans. They positioned themselves to be the managers of the funds that ultimately made their way to these plans. What’s worse is these companies don’t participate in the same theories they pitch you and I everyday.
I’m not going to take you into the details of how investment firms have taken control of retirement funds, but suffice it to say there has been a massive transition, for the worse, from safety and guarantees, to risky, unpredictable stock market investments. Thousands of Americans are starting to see the outcomes of these failed models, and the consequences are devastating.
Chapter 3
How I Earned 300 Percent Returns
Among many stories about those who have benefited from cash value life insurance, my family and I have enjoyed massive benefits in our finances.
I’ll spare you all the details, but suffice it to say for nearly 11 years I participated in the stock market and mutual funds like the average investor. In short, after over a decade, I had less money than I had put in. Like many of you, that strategy simply did not work for me.
Since then I’ve followed a different philosophy. Never lose money. Almost every wealthy individual I’ve ever met or learned about was driven by keeping money safe, reducing risk, and making smart decisions. It’s never uncalculated, and it’s never out of their control.
In fact, one of the greatest investors of our day, Warren Buffett, subscribes to a similar mentality. When it comes to investing, he’s quoted as saying, “Rule number one is never lose money. Rule number two is never forget rule number one.”
Just watch the TV series “Shark Tank” for 5 minutes and you’ll understand how the wealthy look at risk. These billionaire investors pass up opportunity after opportunity waiting for home run deals. I call the risk they take “smart risk” and I’ll explain why in a bit.
In 2008 the markets took another huge dive. It’s a common characteristic of the market to have massive setbacks, but this one was devastating. Some have said it was the worst since the Great Depression.
While everyone was in a panic, I had not lost a penny. I had my money safely tucked away inside my cash value life insurance policies. I was safely growing my money, unaffected by the changes in the markets.
As more and more people struggled with losses, there became more and more opportunity for those of us that had access to money.
After waiting patiently, I found the perfect opportunity to invest in two real estate properties. Just like many of the stories I’ve shared, I borrowed from my cash value policies and paid for the properties in full. I purchased them for same price they sold for in 1984, nearly 25 years earlier.
Now fast forward 3 years. Those properties have more than tripled in value, and I’ve recouped my entire investment from rental income alone. A handsome reward for patience and smart, calculated risk taking.
I stuck by my rule: never lose money. While that can’t always be guaranteed, the absolute worst case scenario I could think of was breaking even on my investment. There was a lot of upside potential, and seemingly little downside. It was risk worth taking.
I consider myself very fortunate to have learned about cash value life insurance and to have used it so heavily in my life. I’ve been blessed to avoid so many of the pitfalls and disasters that plague the vast majority of hard working Americans. Greed has shaped the investment community, rigging the game against the individual investor (you and me). I’ve witnessed it first hand. As pretty a picture as they have painted, the financial industry is unraveling quickly, and people experiencing the market roller coaster are looking for a better way to handle their finances. I urge you to take serious consideration to what I’m about to teach you, and how you can adapt these principles into your finances.
Chapter 4
Winning With Taxes
I'm constantly amazed at how most people plan for taxes. It’s so different than what you’d see inside the financial plan of some of America’s elite. It’s hard to convince them to lock up money and let Uncle Sam decide the best time and rate to pay taxes. That’s just not very smart.
It’s such a critical topic, and one I hope you won’t take lightly.
I’d like to take a second and explain what I like to call the “401k Predicament.”
You see, retirement plans like 401ks, IRAs, and other government plans are designed to postpone the taxes you will pay on your earned income.
If you are in a higher tax bracket today than when you take it out, you will save money on taxes (you win). If, on the other hand, you are in a lower tax bracket today then when you take it out, you’ll pay more taxes (you lose). So the predicament becomes whether or not to postpone taxes. The truth is it’s not that much of a predicament because the evidence is overwhelming. Most people are clearly retiring in higher tax brackets than in their working years. They are losing the tax game.
In the late 70’s and early 80’s when retirement plans like the 401k started, tax brackets were extremely high and were designed to be lower in retirement years. What worked then is just not working today.
I took the time to interview 5 Certified Public Accountants to tell me what they see everyday as it relates to retirees and tax brackets. I was stunned by the confidence in their answers.
Here are a few of their comments:
"I'm seeing them retire with very few deductions and if they've been socking it away in 401ks or just tax deferred plans, I see them retiring with very few deductions and 100% taxable income." - Kevin CPA
"I see it all the time with people who've created wealth, and done the right things with their money throughout their life. By the time they retire they're actually making more money than they did when they were working." - Cameron CPA
"I think that most folks expect a lower tax bracket and that doesn't develop the way they anticipate - Rick CPA
The majority of Americans are socking money into retirement plans that postpone taxes, a poor bet. Across the board people are retiring with more income and/or lower deductions, and it’s truly killing their retirement income. Here’s why.
During your working years you have a lot of things to potentially keep your tax bracket down. The mortgage interest deduction, student loan interest deduction, exemptions for children, and lower income in earlier stages of your career.
It’s likely that inflation alone will bump you into higher tax brackets, but especially when you take away deductions and exemptions, leaving nothing to offset increased income. This is exactly what our CPAs are seeing for many Americans. And the more successful you have been, the more you lose.
And last but not least, it’s clear that the government needs, and is seeking, more revenues. The combination of high spending, high national debt, and some of the lowest tax brackets in history could be a possible indicator of increasing taxes. And as of right now, some of those increases have already taken place.
While I hesitate to make a blanket statement here, knowing every situation is unique, consider the benefits of retiring tax-free. There is peace in not having to worry about what tax bracket the future holds. Chances are you’ll save on taxes and you’ll sleep better at night.
The truth is, more and more people are having the proverbial light bulb over the head moment. They've realized that taxes aren't going down, and they need to rethink their tax plan.
That's why a tax-free retirement is a breath of fresh air.
Chapter 5
What the Wealthy Know About Risk
In the financial industry you hear a lot of discussion about risk. It’s widely accepted that risk is a natural part of building wealth. While I agree that taking the right kind of risk can, at times, be extremely profitable, I do not believe it is a requirement, and I certainly don’t believe it should be taken lightly.
You see there are two types of risk. One type has the potential for creating significant wealth. It’s the type that Walt Disney took when he started Disneyland, the type that Ray Kroc
took when he started McDonald’s, and it’s the type thousands of men and women have taken throughout the years to achieve their dreams. I call it “smart risk.”
Smart risk is simple. It’s calculated risk. You understand why you are taking it and you see the potential gains for risk well taken. This doesn’t always go your way, but that’s okay, you knew what you were in for.
The other type of risk is the excuse to make unsound financial decisions. It’s justification for a bad investment model. It’s the kind of risk Wall Street tells us is necessary. I call it dumb risk. Dumb risk is uncalculated, you don’t know why you’re taking it other than you think you should be taking risk, and you have no clue what the potential outcome could be.
Now you tell me, is it smart risk or dumb risk to invest money without knowing where it goes, why it’s going there, or what you’ll gain from it? Most Americans are taking dumb risk, unnecessarily riding the Wall Street roller coaster.
You see, taking smart risk is an advanced skill. Not everyone wants or even needs to take risk. If it’s not smart risk don’t take it. Most people would do just fine saving faithfully, and growing it in a conservative tax free environment like life insurance. No risk necessary. This is why so many corporations use this strategy to pay employee pensions. It’s safe and they can count on it. No risk involved. Their actions speak volumes.
Here’s a great example of smart risk versus dumb risk. Warren Buffett makes billions of dollars buying stocks. Millions of Americans invest in the stock market everyday. While they both buy stocks, it’s extremely different. For Mr. Buffett, buying a stock is buying a company. He knows the company, he calculates the risk, sees the potential, and pulls the trigger. The vast majority of Americans are mindlessly tossing money into the market, hoping something good will come of it. One is smart risk, the other is dumb risk.
Chapter 6
Supercharged Savings with Cash Value Life Insurance
A few years ago I was approached by an older gentleman in his early sixties named Jim. Jim wanted my help and expertise to move more assets into a high cash value life insurance policy.
24 years ago Jim was approached by his brother, Scott, a newly licensed insurance agent, to buy an insurance policy for him and his family. As you can imagine, he felt obligated to buy the policy. His fear of telling his brother “no” was far greater than the few hundred a month it would cost him for the policy. There’s a good chance many of you may have experienced this same situation.
As the years went on, his investment strategy was to follow the advice of the “experts” and his peers… “Invest in stocks, mutual funds, and your 401k.”
Now fast-forward 24 years. Jim has assets in 401ks, IRAs, and his life insurance policy. But here’s what’s interesting. It took Jim 24 years to realize his life insurance policy was his best investment. It had earned a little over 6%, it never lost money, and it had outperformed the investments in his 401k and IRAs. Now he wanted to move the rest of his money into a high cash value life insurance policy.
Ironically the policy he had so reluctantly purchased from his brother turned out to be the smartest financial decision he had made.
This is not an uncommon story. I’ve heard it more than once. Had my client been presented with a high cash value life insurance policy, as opposed to a more traditional type policy, he would have seen the benefits he was excited about much sooner.
Growth
A case study by Mass Mutual Life Insurance Company showed the performance of 3 policies from 1980-2013. The internal rate of return for each of these policies were 5.65%, 6.02%, and 6.22%.[10]
And while it’s not necessarily excessive returns, it’s better than what most people have earned in the last decade or two in the markets, without the emotional stress that comes from such a wicked roller coaster ride.
According to Crestmont Research, the S&P 500 earned actual returns (before management fees and taxes) of 0% in the last 5 years and 2% in the last 10 years. You’ll have to go back 20 years to hit a high of 7% annual returns.[11]
Now if you’re thinking you might be able to do better with mutual funds, it’s highly unlikely. According to Standard & Poor’s, over 99% of mutual funds consistently underperform the S&P 500. Chances are, if you’re invested in the stock market and/or mutual funds, the S&P 500 returns would be your best case scenario.
In comparison, cash value life insurance has done very well, and we’ve only started scratching the surface. You see, cash value life insurance is one of the most tax friendly financial tools we have. Money inside cash value life insurance, when handled properly, grows tax free, can be used tax free, and passes on tax free.
So let’s consider 2 additional factors, taxes and fees.
The case study showed life insurance policy returns of 6%. If you are in a 30 percent tax bracket, it’s the equivalent of 8.6% returns with taxes.
Now assuming a conservative 1% management fee, the equivalent return in the market would have to be upwards of 9.6% to compare to the life insurance returns. I can safely say (with the research to back it) it’s not very realistic to expect 10% returns every year in the market. Anyone who has had money in the markets for more than a few years knows that.
Another calculation we could make is the additional cost of term insurance you would have to buy in order to compare more accurately to what the cash value policy offers. While we are heavily focusing on this as a place to stockpile cash, it’s important to remember that the death benefit it provides is extremely beneficial as well. We’d have to increase our “equivalent returns” even higher to account for that.
In short, the growth inside a cash value life insurance policy is not flashy, but is conservative, consistent, and extremely competitive. Anyone who tells you otherwise is woefully ill-informed.
“But I Can Get A Better Return”
You might think the point of this section is to try and convince you that you can’t get better returns, but it’s not.
I strongly believe that conventional forms of investing will fall very short of what a solid cash value policy will do with far less risk, especially stocks and mutual funds. But the truth is it doesn’t matter.
One of the best benefits of cash value life insurance is the guaranteed access to money at any time you want it. If you feel you can get better returns somewhere else, and you’re willing to take the risk, the insurance policy will actually make the investment more profitable… more on how that works later.
Case and point. I have money in life insurance, but I’ve leveraged my policies for greater growth opportunities. My real estate investments have paid double-digit returns consistently for a number of years, and my policies have not restricted me from making those investments. On the contrary, accessing those dollars from my policies has simply made my investments more profitable.
Look at it this way. Your policy is creating a benchmark for you to help decide if risk is worth taking. If your policy is earning 5%, this is your benchmark. If you can do better than 5%, the money is there for you to use and increase your returns elsewhere, so long as you are willing to take the risk.
Tax-free growth
I don’t know about you, but I’m worried about taxes. Most people give up more to income taxes than almost anything else, and it can really damage your finances as we’ve seen. I know that if I don’t prepare adequately, I’ll have to suffer the consequences of poor planning.
Among many benefits, I believe one of the most attractive benefits of cash value life insurance is the way it is taxed. These benefits alone attract those that want protection from the uncertainty of taxes.
Let’s talk about a few of those tax benefits.
The first, and arguably one of the most important, is the tax-free growth.
It’s pretty simple actually. Growth inside an insurance policy is called a dividend, and by definition, is considered a “return of premium.” Since they are considering it a return of what you have already paid, it is not taxable.
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bsp; That being said, there is one caveat; as the policy grows, you will have undoubtedly accumulated more than you contributed if you’ve designed it for high cash value. If at any point you decide to withdraw your money from the insurance policy, the growth (everything above the cost basis of the policy) can be taxable.
For example. If I’ve contributed $100,000 to the policy, and my cash value is $300,000, withdrawals up to $100,000 would be considered cost basis, and not be taxable. Withdrawals passed that cost basis would result in taxation. By handling this policy correctly, I can avoid the taxable events by using a combination of withdrawals and loans. I’ll talk more about how to do this later.
As long as it remains intact, it will continue to grow tax-free indefinitely. As you’ll soon discover, there is practically no reason to ever cancel the policy, keeping those dollars tax-free for the rest of your life.
Money, Wealth, Life Insurance Page 2
