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Family, Finance, Freedom
Net Wealth Finance Basics
Concepts Introduction
Our articles and public videos provide much more detail, but these are the basics
Whole Life Insurance
A whole life insurance policy with a mutual company is generally best for those that want to have the highest guaranteed returns for life.
IUL Insurance
Indexed universal life insurance provides downside protection but can offer higher potential returns than whole life insurance.
Compound Interest
Compound interest in whole life insurance is based on a dividend paid and comes from indexing the stock market for IUL insurance.
Policy Loans
Different loan structures are available to different products that allow for accessing both the premiums paid into the policy and the gains.
Uninterrupted Growth
You can have a 0% net cost to borrow or even experience growth on funds that you have a loan against, so compounding is never interrupted.
Invest
Use your policies as a line of credit to invest in real estate, fund business ventures, day trade, or various other cash flow growth strategies.
WE HAVE Answers
FAQ
Properly designed whole life policies with a good mutual company have historically yielded 4-6% annualized internal rate of return. This is factoring in the unprecedented low interest rate environment for over a decade. That can end up being a lot of compound interest gains.
Whole life insurance with direct recognition will change the how they pay the dividend if there is a policy loan. This can mean that the borrowed funds will have a reduced dividend. It can also mean that the dividend will be higher on the borrowed funds.
Non-direct recognition whole life insurance does not change the dividend on a policy when there is a policy loan. It is not simply that one is better than the other. Get in touch with us for more in depth discussion or check out some of our articles and videos.
Some carriers have online portals to submit a loan request and others require filling out a form. Some carriers will do a direct deposit or wire transfer to your account and some will mail a check. Generally, most carriers will get you the funds within a few days but it can take a good bit longer depending on how the requests are submitted and how the funds are sent out.
You pay interest on the loans to the insurance company. Some carriers charge fixed interest rates and some have variable interest rates. This is generally annual simple interest, meaning that if you pay the interest within a year, it will not compound. If you don’t pay the loan by the end of the year, then it will be added to the loan balance. This means that you can treat policy loans like interest only loans, if you choose.
Insurance-based Line of Credit (IBLOC) for short is similar to a home equity line of credit (HELOC), but the collateral is your death benefit. Banks can offer IBLOC at extremely competitive rates because the death benefit is guaranteed to pay out. An IBLOC can be an effective way to be able to have quicker access to funds than a direct policy loan.
Net Wealth Finance can be considered another name for the Infinite Banking Concept and we were first introduced to it through that name. Some of the other names for this concept are Bank on Yourself, Be Your Own Bank, Cash Flow Banking, And Asset, and various other names.
We coined the term Net Wealth Finance because we believe it is much more descriptive of these concepts. First of all, we do not actually eliminate the need for traditional banking with these strategies. You still need to move policy loans through some type of banking institution unless you plan to bring physical checks to check cashing places that charge fees. We can potentially replace the financing portion of traditional banking with Net Wealth Finance.
Through Net Wealth Finance we are building wealth during our lifetime but also the net wealth that will be passed to our beneficiaries through the death benefit. We prefer calling it net wealth, rather than net worth because we do not believe that our worth is derived solely from money.
There are a lot of factors that go into why someone would choose either whole life or an IUL. If someone wants a good forced savings mechanism with the highest guaranteed growth then whole life is probably preferred. If someone wants market-like returns but with downside protection then an IUL is a good choice. Both whole life and IUL insurance have tax advantages.
We generally find that most people that go deep into learning about Net Wealth Finance will want to fund for a long time. It is possible to fund for a short time.
Whole life insurance has the concept of reduced paid-up (RPU). This means you reduce your death benefit to only how much insurance is fully paid-up. By doing this, you eliminate much of the expenses in a policy and it will continue to growth cash value and death benefit for the rest of your life. Typically, this can be done in around 7 years, but there are ways to do it in less time.
IUL insurance does not have the concept of RPU, but you can reduce the death benefit to the minimum and stop funding it. If it has been properly funded then the policy should continue to grow as well as cover the expenses.
A MEC is a modified endowment contract. Years ago, people realized that they could use life insurance as a tax shelter. The federal government put limits in place to control this. The MEC limit is the amount of money that can be put into a policy and continue to keep tax advantages.
It is best to avoid turning a life insurance policy into a MEC. We design policies to maximize the amount that can be put into a policy and still avoid a MEC.
There are a lot more factors that go into indexed universal life insurance returns. In properly designed policies, with the correct carriers and products, historical returns have been 6-12% average annualized returns. There might be some years where you could see a 30% gain with uncapped indexing strategies, but there could also be years where you have no gain or a slight loss, depending on the product and strategy.
IUL has not been around nearly as long as whole life insurance and so it does not have as much of a history of returns, so this can be a factor when choosing only one of these products.
When you used an IUL indexing strategy, the carriers still generally invest the majority of the funds into safe yielding assets similar to whole life carriers. The difference is that rather than paying you that smaller yield directly, they allow you to index the markets. The carrier will buy long call options against an index which allows you to experience significantly more growth in a rising market. This strategy also provides the downside protection because they are not using the majority of your funds. The products that we prefer will have a maximum loss of 1% and can oftentimes have a guaranteed return instead.
IUL insurance policies can have a few different loan options. One of the preferred ways to borrow in an IUL is called an indexed loan. Some carriers may offer this as a fixed rate loan and some others at a variable rate loan. Some products may have a variable rate loan, but a fixed cap on how high they can adjust the rate.
In any case, the indexed loan allows for you to continue to have the full gains from the index with the borrowed funds. For example, you might be paying 5% interest to the insurance company in a given year, but those same funds may earn 8% that year. This means that you had a net gain of 3% on borrowed funds that you might have used to invest elsewhere.
Another type of IUL loan would be a wash loan. This is a loan where you pay a rate to the insurance company, but they credit your account with the same rate (or very close rate). This basically means that your net cost to borrow is a wash or 0% interest.
We still believe it can be advantageous to invest directly in the market. It really takes an analysis of the complete financial picture for a person to determine how much should be saved within traditional retirement accounts, a Roth, traditional brokerage, or within an IUL.
One major advantage with an IUL is that you can borrow against a policy to achieve gains in two places at once. Something similar can be done with a 401k loan, but that has a hard limit of $50,000, which limits how you can deploy the funds. If you build enough cash value with an IUL, you could borrow millions of dollars to fund a real estate deal, if you desired
A Securities-Based Line of Credit (SBLOC) is a way that you can borrow against assets within a brokerage account. The rates can be pretty favorable when using safe underlying assets that are valued really high. Generally the amount that can be borrowed through SBLOC is a much lower percentage than through a life insurance policy.
There is a major risk to using an SBLOC if the value of the underlying securities drop.
- You have a required ratio of loan to value of securities
- This is often around 50% of asset value
- If you borrow close to that limit
- You might be force to add funds to the account
- Pay off the loan balance
- You might be forced to sell the underlying securities and possibly realize a gain (tax bill).
When using these funds to build wealth elsewhere, you do not want to worry about this situation. It is risky.
Most traditional financial advisors will tell you to buy term insurance and invest the difference. That is a viable strategy, but one thing to keep in mind is that term insurance is purely an expense. By using overfunded cash value life insurance, you can turn the insurance expense into an asset that grows.
With proper design, you can choose to only fund whole life or IUL insurance for a few years. You can still continue to have life insurance for the rest of your life. The cash value will continue to grow which also further increases the death benefit. You can also use it to fund wealth growth elsewhere at the same time.
The age and health of a person are important for determining whether a cash value policy makes sense for a given funding level. This strategy can work with less than $100 per month for a young and healthy person. The amount of money required for strong cash growth will increase with age and if the individual has health conditions that affect their insurance health rating. We can definitely discuss your individual situation to assist in determining funding levels that make sense.
The funding limits are based on the amount of death benefit that a person qualifies for. This is generally determined by a multiple of the insured’s annual income. The multiple depends on the age of the individual. If there is little or no income, the death benefit can also be determined through net worth calculations.