“Success is where preparation and opportunity meet.”
– Bobby Unser, Indianapolis 500 Champion
“If you have cash, opportunity will seek you out.”
– Nelson Nash, financial author and speaker
Are you locking up your assets, or keeping them liquid? Do you have access to cash on demand? The answer may be influencing your prosperity more than you realize.
Most investors focus on the ROI (return on investment) of an investment or a savings vehicle. However, locking up your money can actually severely limit the possibilities for lucrative returns! This is because some of the best opportunities cannot be capitalized on (literally!) without access to cash.
1) To provide with capital.
2) To gain advantage from.
Most accumulation vehicles lock up your dollars. If you put money into a retirement plan, your money stays there, sometimes for decades. If you save in an educational savings plan, that’s where your dollars remain until needed for tuition. If you invest in a business or real estate deal, your cash is locked up there for a certain length of time, or until the investment is liquidated. If you purchase a car with your dollars, your money is now on 4 wheels in a depreciating vehicle.
Todd Langford of Truth Concepts financial software is fond of saying, “Most assets are either/or assets, but (whole) life insurance is a both/and asset.” This is a perfect way to describe the advantage of having an asset that can be easily used as collateral.
Usually, you have to liquidate assets or divest yourself in order to get access to use your dollars elsewhere. It’s “either/or” – you can save, invest, or spend, but you’ve got to make a choice. Cash value life insurance, however, is a “both/and” asset. As you keep funding your life insurance policy, the cash value grows, and before you know it; you have options.
Do you need money for an emergency? You’ve got it. An lucrative opportunity? Yes, you can! What about a honeymoon, a business start-up, or a down payment on a rental property? Go right ahead.
While you can simply withdraw the cash from your policy (using it as an “either/or” asset), we highly recommend that you leave the cash value IN your policy and borrow against it. By accessing capital with policy loans, life insurance becomes a “both/and” asset.
Your savings will continue to grow and earn dividends while you gain access to the cash you need for an emergency, an investment, or a major purchase. Then you can repay the loan on your own time schedule. Extra payments? Of course! Need to skip a couple of payments? No problem. (We do recommend that you be an “honest banker” and pay your loan back diligently!)
Current policy loan interest rates are between about 5% and 8%, annually, depending on which company your policy is with and whether it is a fixed or adjustable rate. But the specific terms of your policy aren’t as important as your ability to access cash when you need it!
Here are 5 examples of how opportunities can find you when you have access to capital:
1. Cash in on an Opportunity
Perhaps a friend wants to sell a classic car for much less than what it’s worth to generate some quick cash. The car can fetch $30k for a patient seller in the right market, but he’ll take $20k if you can get him the cash next week. Let’s say you buy the car at $20k and resell it for only $27k. You borrow the $20k against your cash value, pay 6 months of interest at an 8% annual interest rate (an additional $785), and you sell it for $27k.
You’ve just generated a $6,215 profit, or an annualized return of 68.74%!
2. Be the Bank
Perhaps your business needs some new equipment, and you discover that the lease on the new machines will cost you the equivalent of a three-year loan at 21% annual interest rate! Even worse, if you prepay the lease, you’ll STILL pay the steep financing fee!
You might save thousands by being able to provide your own financing in such a situation… all because you had access to cash. In the example below, a $20,000 loan (or lease equivalent) at 21% interest will cost $27,126, while an 8% interest loan over the same time period, only $22,562:
3. Earn Cash Flow
Let’s say the business equipment scenario above isn’t your own business after all, but perhaps the business of a trusted family member. Could you offer to finance the equipment at a rate of 12%? It would be a fantastic savings for them, and you could borrow cash at 8% from a policy loan (no questions asked) and earn 12%.
You’d be making 50% more than you’re paying in interest on the borrowed money, while saving them thousands! (Of course, you would have to be confident that you’d be repaid at the agreed upon rate!)
4. Create an Income
When you have access to cash, you can keep your eyes and ears open for exceptional business or real estate deals that could set you up with long-term income.
One client used his cash value to invest in cash flowing commercial real estate that generated an extra income for him after he was forced into an early “retirement” with a disability. By taking advantage of policy loans and the leverage of a mortgage, he was able to turn an excellent real estate deal into an even better one!
Learn the details of how borrowing against a life insurance policy turned an excellent investment deal from 26% gains to a whopping 111% rate of return in an article on the TruthConcepts.com blog, “How Do I Tell if my Real Estate Deal is a Good One?”
5. Take the Opportunity of a Lifetime
Sometimes, the “return on investment” isn’t financial at all, it’s personal. Perhaps it’s taking the trip of a lifetime, or checking a major item off of your bucket list.
Network marketing entrepreneur Jordan Adler, one of the speakers at the 2015 Summit for Prosperity Economics Advisors, had always had a dream to “go to space.” Sounds pretty far-fetched, doesn’t it? For most, it would have been an impossible dream. But when Jordan actually got an opportunity to actually book a spot on a commercial space flight (with a six figure price tag), he said “Yes!” He knew he could access the money with a policy loan, no questions asked, and repay it at his own timing, without disrupting his other investments.
The Cost of Cashing Out
Many people consider their 401(k)s or IRAs to be their “savings.” But qualified retirement plans aren’t liquid and make poor piggy banks. You’ll pay penalties and income tax, which can gobble up nearly half of any withdrawals! In 2010, Americans paid $5.8 billion in penalties alone by tapping $58 billion in retirement funds before they were supposed to.
Borrowing 401(k) monies for allowable reasons (such as a home down payment) is also deceptively expensive due to the tax treatment. You’ll have to replace those before-tax contributions with after-tax dollars, which means you can add your tax bracket rate onto the cost of the loan!
If your dollars are locked up in typical assets, you have no liquidity.
Life Insurance: The Both/And Asset
When you have a solid, liquid asset such as life insurance cash value, you can leave that asset intact, and easily borrow against it. This leaves you with your original savings plus access to cash for your neighbors car, your child’s tuition, or the investment that will pay healthy returns. Best yet, your savings will keep growing, off-setting some of the interest costs. (You may even be able to use your policy cash value to obtain a bank loan at an even lower interest rate!)
You can argue that a certificate of deposit could give you the same advantage of liquidity – after all, what bank won’t lend against their own certificate of deposit? However, here again, we discover that whole life insurance is a “both/and” asset” in the way that other savings vehicles are not.
Typically, you have to choose between investments, savings, or insurance vehicles. With whole life insurance however, you are saving and insuring at the same time. Not only will you eventually have access to every dollar put into the policy as your cash value grows, you’ll also have protection over and above the cash value the moment your first premium is paid.
In this way, life insurance is a self-completing savings strategy. Should something happen to you, the policy can still pay for your child’s tuition or supplement your spouse’s future income.
Can You Capitalize on Opportunities?
Whole life insurance is the best place we know to store long-term cash (with a permanent self-completing savings mechanism) and the best way to build liquidity for future investments, emergencies, and opportunities.
If you could benefit from great liquidity in your personal economy, let us run an illustration for you to show you how a whole life policy with maximum paid-up additions grows cash value faster than a traditional whole life policy. Contact Partners for Prosperity today!
For the definitive “handbook” on creative ways to capitalize with whole life insurance, see Kim D. H. Butler’s Live Your Life Insurance. The revised, expanded version is now available in paperback! (Stay tuned for Kindle and Audible editions.)
~by Kim Butler and Kate Phillips