Taxes, Losses, Fees, and Use
The founder of the Infinite Banking Concept, R. Nelson Nash, said, “The very first principle that must be understood is that you finance everything you buy–you either pay interest to someone else or you give up the interest you could have earned otherwise.” Anytime you use a dollar, lose a dollar, or pay an unnecessary tax or fee, you don't just lose that dollar: You lose what that dollar could have earned for you the rest of your life.
Truly understanding the impact of losing a dollar requires understanding the “opportunity cost.” Simply put, “opportunity cost” means that every financial decision we make has a consequence. Those consequences create ripple effects that branch out into the future. If we spend dollars now, we forgo the interest they could have earned over the rest of our lives.
There are four ways to kill compound growth: Taxes, Losses, Fees, and Use. Each flattens the compound curve by removing dollars that could otherwise gain interest. For more examples of this in action, see our blog on “Why Lifetime Uninterrupted Compound Growth is 10x More Powerful Than You Think”.
We often think of spending dollars (like discretionary spending) as an opportunity cost, but even controlling our dollars by saving has an opportunity cost. If we allocate our dollars to one savings vehicle, we choose not to use another. We use savings vehicles to achieve the power of compound growth, but not all savings vehicles are created equal.
There is one liquid savings vehicle that gives us the best of both worlds: Uninterrupted compound growth with minimal lost opportunity cost. That savings vehicle is permanent whole life insurance.
Permanent Whole Life Insurance
Permanent whole life insurance from a mutual, dividend-paying life insurance carrier can be designed so that the living benefits (i.e., accessible cash value) are as powerful as the death benefits paid out to your beneficiaries.
It’s a safe harbor that shelters your assets from taxes, losses, and fees.
Due to the unique legal structure of the private contract and because it’s funded with post-tax dollars, the money inside your cash value never leaves, gets taxed, or experiences ongoing management fees. This private line of credit can be accessed tax-free while you are alive by borrowing against it.
A small portion of the cash value growth is due to premiums you’ve funded into the policy. Still, the lion’s share of the growth is due to the accumulation of annual dividends made possible by the performance of the carrier’s investment portfolio. The dividends paid to your policy grow larger every year.
It sounds paradoxical, but no money leaves the cash value if you borrow against it. Whatever amount you request in a policy loan gets collateralized inside your cash value. At the same time, you get an unstructured policy loan from the general fund of the insurance carrier with a specific finance charge attached to it. It’s up to you when or if you want to repay the loan.
Regardless of when you repay that loan, the money inside your cash value has compounded uninterrupted the entire time. The benefits of a properly structured policy include loss protection, tax favorability, low fees, and the option to use the cash value as you see fit.
Taxes
The cash value of a whole life insurance policy grows tax-deferred but can be used tax-free and distributed to your beneficiaries income tax-free.
For a comparison, let’s say there is a savings account that gives you a 4% interest rate. Not bad, huh? But, you will be taxed on the interest earned in your 4% savings account. Will that savings account pay you that same rate for the next thirty years? Most definitely not.
Properly structured whole life can often have an internal rate of return in the 3.5% to 4.5% range. Regardless, if you stacked up a 4% savings over thirty years and a 4% life insurance policy over thirty years, the life insurance would win by a country mile as the savings account values will be taxed yearly.
Furthermore, when you look at the economy, politics, and everything else in our country, you must ask: “Are taxes more likely to go down or up?” Most people would say taxes are more likely to go up than down. Many say they need to go up based on our national debt obligations.
During World War II, tax rates for the highest income bracket were as high as 90%. While that may be a stretch to imagine happening again, the fact that it has happened in the past means there is a precedent to do so. In light of this, tax-favored vehicles are an attractive option for those who understand the implications of higher taxation.
Loss
The cash value of your life insurance policy is contractually obligated to grow every year for the rest of your life without a down year - every carrier has a different guaranteed interest rate.
Beyond the interest rate, mutual insurance companies share their profits as dividends with their policyholders every year. As you can imagine, dividends can fluctuate yearly depending on the carrier’s profits. Some of these companies have been paying dividends yearly, without fail, for over 100 years, some closer to 180 years. The guaranteed growth and potential of dividends based on nearly two centuries of track record give you significant loss protection.
Beyond this, whole life insurance offers creditor and bankruptcy protection in most states - making it nearly impossible for your policy cash values to be accessed by anyone other than you.
Fees
One of the most brilliant fee structures in our financial system today is the brokerage/management fee.
This fee, whether flat or percentage, is charged to you based on the amount of assets held and managed by that broker. This particular fee is due no matter what. If the portfolio drops 10%, the fee is assessed. If it increases by 10%, the fee is assessed. In a world where most advisors put most of their assets under management into ETFs (like the S&P 500), it’s an incredible way to ensure the advisor gets paid no matter how the market performs. These fees can be all over the board as mutual funds and brokers may charge fees independent of each other on your same invested dollars. These fees usually run between 1.5% to 2.5%.
Ongoing fees are added to many financial products today because the provider wants to profit. The downside is that those fees can chip away at the growth of those products over time. Whole life insurance also has associated fees but with an important caveat.
From mortality expenses to load fees on paid-up addition riders, whole life insurance is not a “fee-free” product. However, it is unique because these fees do not inhibit the growth of your policy year to year. As your cash value grows over time, no management fee is assessed yearly based on the growth or the account value.
Use
Our single greatest financial need throughout our lives will be to use our money. After all, our money buys the necessities of life that make us happy. But, unchecked “use” may limit our ability to experience compound interest.
In all other savings vehicles, you must trade liquidity for performance. You must lock your dollars away in liquidity jail to experience noteworthy asset growth. You can’t use them. But not with whole life insurance. Whole life insurance has high liquidity, allowing you to access 90% to 98% of the net cash value via policy loan anytime.
Your ability to borrow against your cash value means that even as your dollars continue to experience uninterrupted compound growth, you can get a policy loan to invest in an income-producing activity or as supplemental retirement income. The loan from the insurance company acts as an unstructured line of credit that is fully collateralized. There is no repayment timeframe, and the value of your collateral (cash value) continues to grow. As you pay down the principal, your associated interest decreases as well.
Most loan requests are processed within a week.
Combine this with any other asset class, and you will see the power of liquidity at work:
- Need home equity? Get ready for a one to three-month application and closing process for up to 80% of your equity with fees and an amortized loan.
- Need to use your savings dollars? You have to remove them from your savings to use them elsewhere.
- Borrowing on margin on your stock portfolio? You can sometimes borrow up to 50%, but your loan can be called due if your margin gets out of line with the lending contract.
There is no other loan product out there where the lender also guarantees the value of the collateral and promises to cancel the loan if you don’t repay it before your death. This relationship makes life insurance loans the most flexible loan product on the market.
How Do I Get Started with Whole Life Insurance?
If you want to unleash the power of compound growth in your asset portfolio, we are here to assist you. We work with various carriers to ensure we can structure a life insurance policy to fit your needs and get you closer to your goals.
Schedule a clarity call today to ask how life insurance might fit your situation.
