Net Wealth Finance can Unlock Financial Freedom
Understanding Net Wealth Finance
In personal finance, it can be difficult to find foundational strategies to help individuals secure their financial future. We coined the term Net Wealth Finance to more accurately describe this powerful approach. Net Wealth Finance transcends the traditional terms like “Infinite Banking Concept” and “Bank on Yourself”. It offers a clearer, more effective description of leveraging life insurance for financial growth. In this article, we will explore how Net Wealth Finance can revolutionize your financial foundation and grow generational wealth.
At its core, Net Wealth Finance leverages the benefits of overfunded permanent life insurance policies. Currently we are specifically using Whole Life and Indexed Universal Life (IUL) insurance. These policies are not just about providing a death benefit; they are powerful financial tools that offer opportunities for growth and liquidity.
If you would prefer to get an intro to these concepts through a video, this video walks through some of the elements we cover in this article.
Why Call it Net Wealth Finance?
The term Net Wealth refers first to the death benefit component of the strategy. Death benefit is a large component of a person’s net wealth. There will obviously be other elements at play to arrive at the total net assets in the person’s estate. However, the death benefit is a guaranteed asset for our beneficiaries. We just need to meet our contractural obligation, which is primarily paying the premium.
The Finance portion refers to the use of the cash value to replace aspects of traditional financing tools. This could be a bridge loan for a real estate investment. Another option is a capital expenditure for a business using heavy equipment. You could fund business inventory purchases. There are various other types of financing activities that this strategy can supplement or replace.
When we combine these things into Net Wealth Finance, we borrow against the cash value in our life insurance policy. This is a subset of our death benefit, to finance cash flowing activities. You can also choose to replace traditional personal financing for things like car purchases. We don’t prefer that since the most beneficial use is in wealth building activities rather than consumption.
The Power of Overfunded Permanent Life Insurance
Overfunding permanent life insurance means that you fund at a level that is higher than the expenses in the policy. This extra contribution builds cash value within the policy, which grows tax-deferred. Whole Life insurance offers guaranteed returns. Indexed Universal Life insurance provides the potential for higher returns linked to a market index, such as the S&P 500, without the downside risk.
When whole life insurance is properly designed and funded, it should produce an internal rate of return (IRR) of 4-6%. That is over the entire life of the policy. It will generally take a minimum of 4 years for a policy to hit the break even point. Then it will take around 10-15 years for it to get above a 4% IRR. This is due to the underlying nature of whole life front loading some of the insurance costs. These returns may not sound like a lot, but since they are very consistent for the rest of your life, you can rely on them and seek higher risk and reward elsewhere.
Indexed universal life insurance has the potential to have a much higher internal rate of return due to the nature of being tied to market index performance. There are minimal guarantees with an IUL, but a properly designed and funded policy based on a good product from a good carrier could see an 8-10% IRR over the life of the policy. We generally prefer to use carriers with uncapped index options, so any given year can have the potential to have very high returns.
Leveraging Cash Value for Investments
One of the most compelling aspects of Net Wealth Finance is the ability to borrow against the cash value of these life insurance policies. These policy loans typically have lower interest rates and do not require a credit check. The borrowed funds can be used to invest in various cash-flowing activities such as:
- Real Estate: Purchasing rental properties or funding real estate developments.
- Businesses: Investing in or expanding a business venture.
- Other Investments: Engaging in opportunities that generate passive income or substantial returns.
With an IUL, there is even the opportunity for arbitrage between the rate that you pay on a loan and the rate that the funds earn. For example, one of our policies has an indexed loan rate that is guaranteed at 5%. If the underlying index for a given year results in a credit of 8%, then we would get that even on the borrowed funds. This results in a net negative interest rate of 3%, which just adds to the return of wherever we invested the borrowed funds.
By utilizing the cash value of a life insurance policy, individuals can effectively access funds without disrupting their investment strategy or facing significant tax implications.
Complementing Traditional Investment Strategies
Net Wealth Finance acknowledges the importance of a diversified financial plan. While overfunded permanent life insurance serves as a cornerstone, traditional market investments through retirement accounts and brokerage accounts will very often be a large component of a person’s overall asset portfolio.
Generally, if a person allocates a portion of their assets to a properly designed whole life or IUL, they can feel secure in forgoing allocations to things like bonds, CDs, and other more standard safe yielding assets. This depends on the risk tolerance of the individual, but whole life has a strong history of paying dividends, even in extremely low interest rate environments.
Key Elements of Net Wealth Finance
- Compound Interest: Overfunded policies benefit from compound interest, allowing cash value to grow substantially over time.
- Whole life can expect 4-6% IRR over the life of the policy
- IUL is tied to market conditions, but with downside protection; 8-10% is a reasonable estimate for an IRR over the life of the policy
- Tax Advantages: Life insurance policies offer tax-deferred growth, and policy loans are generally tax-free.
- Loan balances get deducted from death benefit when you pass away and the death benefit passes to your beneficiaries income tax free.
- This is the way that gains in life insurance can be accessed without capital gains or income taxes.
- Liquidity: Accessing cash value through loans provides liquidity without the need to liquidate investments.
- Partial/full surrender of cash value – generally not preferred but that is a topic for another article
- Borrowing against the policy at fixed or variable rates (depends on carrier and product) with no loan underwriting
- Diversification: By combining insurance with various investments, you create a well-rounded financial strategy.
- Due to the downside protection in these assets, you could end up with opportunity to capitalize in market correction scenarios
Getting Started with Net Wealth Finance
Implementing Net Wealth Finance requires a thorough understanding of life insurance products and various other wealth growth tools. Working with a wealth strategist who specializes in this strategy can help tailor a plan to your specific needs and goals.
An improperly designed life insurance policy can actually be very detrimental to a person’s wealth growth. As a general rule, a young and healthy person should be seeing around 80-90% of year one premium as cash value in a properly designed and funded policy. If an agent or advisor gives you an illustration that does not conform with that, feel free to book a meeting with us to review it.
A Solid Foundation For Generational Wealth
Net Wealth Finance is a powerful strategy that combines the security of overfunded permanent life insurance with the growth potential of various investments. By leveraging the cash value of life insurance policies to fund real estate, businesses, and other cash-flowing activities, people can unlock new avenues for financial growth and stability. This strategy, when complemented by traditional investments, provides a comprehensive and dynamic pathway to financial freedom.
By laying a foundation for wealth in an asset that will consistently be increasing in value, we are able to aim for bigger returns in other areas of our life. We believe this is crucial to maximizing cash flow and wealth growth. It gives us to really capitalize on opportunities in market corrections, yet still gives us solid growth in good market conditions. To learn more about this strategy, check out some frequently asked questions here.
