In this case study, I will illustrate the exact layout of a high cash value life insurance policy. I’m going to show you the following things:
- Annual contribution of $20,000 per year
- Total cash value at the end of every year
- Total death benefit at the end of every year
- Future income from the policy
Now keep in mind, these are examples, but a similar ratio of contributions to cash value should still apply no matter how little or much you put in. $20,000 is not a magic number, a limit, or a minimum of any kind. There are no minimums or maximums as stated previously.
What you’ll quickly notice as you visit the first year of this illustration is that you’re actually behind. You’ve put in $20,000 but only have $18,365. While better than the typical $0 in first year of most cash value policies, it’s still behind. But the truth is it’s a small price to pay, and it has minimal effect on the policy growth. Here’s why…
Since this is not a savings account, we are abiding by a different set of rules. You see, the insurance company is taking on a lot of risk. In this scenario, they’re letting you use the majority of your money, and taking on the risk of nearly 1 million dollars in the event that you die (Death Benefit year 1: $951,544). In order to do so, they hold a little money upfront, and every year you have the policy, a little more of it comes back. It’s only a few short years and you are back in the positive. This way the insurance company is still protected, and you get maximum benefits.
Now let’s jump to year 29 in this illustration. The cash value is $1,210,266 at this point, and growing at a 5% internal rate of return (meaning its as if every year your money earned 5%). So even though you were slightly behind in the early years, it’s had little to no effect on the future growth. Here’s the kicker though; You now have $2,198,013 of death benefit, an extra $987,747 to your loved ones if you died that year. You’ve successfully built in a massive legacy that will have a large effect on your family.
So here’s the question. Are you willing to give up the use (emphasis on ‘use’) of some of those early dollars (with minimal long term effect on growth), in exchange for the ability to pass nearly an extra million dollars to your loved ones? Are you willing to give up the use of a few dollars in exchange for tax-free growth, access to your money, guarantees, safety, and a slew of other benefits we’ve already discussed?
It’s obviously an extremely simple answer… yes.
Future Income
Now that we’ve looked at the years of savings, lets look at the second half of the numbers.
Keep in mind, at this point, we have saved a total of $580,000.
This is the second half of the same example we’ve been looking at. At age 70, we’ve decided to stop putting money into the policy, and by age 76 we’ve decided to take income from the policy.
In this scenario we are successfully taking $120,000 per year for 19 years. A total of $2,280,000 of total income. Not bad.
Now keep in mind this income is tax-free when handled properly, and doesn’t have to be taken out in systematic increments. You can take it out however you see fit. It’s recommend you consult with a professional to make sure it’s done correctly.
Summary
Tip of the Iceberg
I’ve prepared 2 more case studies that show a different way to fund a cash value life insurance policy, but before I go into them, I want to hit on something important here.
These illustrations represent exactly how your money would grow inside a well designed, high cash value life insurance policy. But truthfully it is just the tip of the iceberg.
What the numbers can’t show are numerous reasons this type of strategy is so valuable, and so heavily used by America’s wealthiest individuals and families. Here’s a brief list of the items the numbers can’t show:
- The extra growth earned by not using a low interest savings account to save money for large purchases (i.e. cars, boats, down payments, weddings, education).
- The taxes you saved by keeping your growth tax free.
- The losses you would avoid by keeping it safe.
- The interest you would save by having access to your money, and not being required to borrow from credit card companies, banks, and other lending institutions at high rates.
- The extra interest you could earn by using your dollars for investment or business opportunities.
All these items have been discussed in previous chapters, so reference them as needed.
What’s important to note is there is a completely different set of numbers that go hand in hand with the simple projection of growth. The savings in interest, taxes, and opportunity cost amount to thousands and thousands more to your future wealth.
The “Banking” Concepts
We’ve already covered loans (See ‘Accessing Money Inside Your Policy’), but this case study helps illustrate a very important point. There are entire financial philosophies geared specifically towards this idea, some call it Infinite Banking, Privatized Banking, Becoming Your Own Banker, etc. Much of which stems from Nelson Nash’s book Becoming Your Own Banker. I’m going to simplify it here for you.
It’s the idea that you should treat your capital the same whether you use it, or you let someone else use it. Let’s look back at year 29. There is $1,210,266 of cash value. That’s a good chunk of money. Since the insurance company is doing its part to grow the money, there is really only one reason for possibly falling short of it… you. If you take money and don’t put it back, you’ll be single handedly responsible for not reaching your financial potential. Don’t let yourself be that reason.
Apart from the fact that the loans are advantageous, they keep the death benefit high, and they keep it tax friendly, loans ensure that your money never stops growing. Every dollar inside the policy is virtually guaranteed to reach it’s potential because it grows uninterrupted. It puts you at a higher level of accountability which will keep you on the path to building wealth.
Rate of Return
One last note. We’ve already discussed how the growth compares to other investments, but I advise you not to get caught up in the returns. This is a platform to improve and enhance all your financial decisions. To compare the returns directly to other investments would be a complete misunderstanding of what I’m trying to portray. I’m not suggesting this as a replacement for good investment opportunities, but rather a better place to store and access cash for those investment opportunities. You can have the best of both worlds here.
The goal for many will be to find a better opportunity to grow their money and get better returns. That is great and admirable. Using cash value life insurance will not inhibit your ability to do so. Rather it will make those opportunities even more profitable (See “But I Can Get a Higher Return”).