“Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.” – Albert Einstein.
This little wealth-building gem was brought to my attention by Chris Larsen of Next-Level Income. It’s a tool of the wealthy (or soon-to-be wealthy) that hasn’t received the press it deserves over the years. You’ll especially love this if you have a love-hate relationship with your bank. Because when it comes down to it, banks want five things. They want:
- All your current savings.
- Regular deposits of your future income (i.e., paychecks, principal paydowns, etc.).
- To hold your money as long as they possibly can.
- You to re-qualify to get your money out via a loan, should you want your money back.
- To charge you a hefty interest rate if you opt for #4.
There is a better solution. It’s a solution where you can stash your current savings, add to it over time, earn a decent return that compounds over time, and you can access that money without having to qualify for it.
The Tool of the Wealthy
This little gem of a deal is a whole life insurance policy that is specifically designed to maximize the amount of cash in the policy while purchasing the minimal amount of death benefit allowed. In the end, you are building your own bank within the policy to build wealth now.
These types of policies are not new, rather they were how regular people stored their cash and grew their assets more than 150 years ago before banks became immensely popular.
This specifically designed policy has some key wealth-building attributes:
- It allows you to protect cash (up to your state maximum) from creditors, predictors, and inflation.
- The interest and dividends paid out by the insurance company compound over time, helping protect against erosion due to inflation.
- The policy has liquidity via a guaranteed loan provision with the insurance company, meaning you do not have to qualify to access your cash. If designed right, loans are out of the insurance company’s general account, so it does not reduce your policy cash value when you take out a loan. This means you can take a loan at a simple interest rate and leave your cash value intact to earn compounded returns. (Albert Einstein would be proud!)
- Any loans you take out hit your debt-to-income and use the cash value and death benefit as collateral. You can use your policy to fund a personal vehicle purchase, start a business, and fund real estate investments all in cash, quickly, and without having to disclose the loan to a lender.
- Most importantly, you can borrow directly from the insurance company at a low, simple interest rate to invest in an asset that will generate a larger return. This investment arbitrage can boost investment returns by approximately two percent. Compound that over time and you have a powerful wealth-building strategy.
Bonus Perk: Once your policy has been in force for six to 12 months, there are banks that offer a specialized line of credit against your cash value at even lower rates than the insurance company. While this requires a credit check and loan qualification process to set up, you now have checkbook access to approximately 90-95% of your policy’s cash value. This type of line of credit also does not impact your debt-to-income score (unlike unsecured lines of credit and home equity lines of credit). For example, I have borrowed as low as three percent and invested in assets that earn seven to ten percent cash flow and 18+% IRR (internal rate of return).
How to Bank on Yourself
The first step is to find a reputable insurance agent that knows how to set up these types of policies (most likely your neighborhood insurance agent is NOT that person). Check out Chris Larsen with Next-Level Income (nextlevelincome.com) as well as Wealth Without Wall Street (wealthwithoutwallstreet.com).
The next steps depend on the process set forth by the company you work with. Generally, you will:
- Decide how large of a policy you want to fund.
- Complete a health exam.
- Review and sign your policy.
- Fund the policy.
This cash value life insurance policy plan is a great wealth-building tool for an investor who manages their credit well, saves regularly, and realizes the power of having money outside of the banking system.