Imagine a pot of money that grows tax-free and which you can borrow against, without interrupting the compounding. If you follow a few rules, no one can ever take it away from you.
That's what sold me on (well designed) life insurance.
Using Other People’s Money (OPM)
Before I get into the specifics, it is important to understand that working with OPM is going to be a major factor in scaling your available capital. Without it, growth mostly happens linearly and is also slowed by fees, inflation, taxes and other factors cutting into the compounding.
The system I share relies on OPM and having secured access to revolving credit. This is the engine that powers everything else. While big investors might have large lines of credit extended to them by banks, for many of us getting started, there are few options.
Home Equity Line Of Credit (HELOC): this will be most individuals’ starting point. If you have enough equity in your home, accessing the equity via a line of credit is the way to go.
Unsecured personal Line of Credit (LOC): with good credit, most individuals can get $10,000 to $50,000 in wholly unsecured LOCs from regional banks or credit unions. Generally the rates are higher, but it still beats using your own money.
Overfunded Whole Life Insurance: This is the far superior source of capital and where you get to another level.
My pot of gold
Did your eyes glaze over when I mentioned life insurance? Ok, I get it. I've worked in insurance for 15 years and even I am bored of it. So let's call it my Pot of Gold (POG). While it does not sit at the end of the rainbow, it does visualize the value, and it is as close as any modern financial product can get.
Here is what your well structured insurance policy can get you.
8 simultaneous benefits from one single product.
From day 1, ~60% of the dollars you put in can be used while growing. After 7 years, your policy can be off to the races with more dollars available than you paid.
The flexibility provided is simply unmatched.
What’s the catch?
So why doesn't everyone do this?
We've been conditioned to think of life insurance or any insurance as a cost. And to be honest it is in the first years of the policy, it has a real cost and if all you see is the payout when you die, it will seem unimportant until you have children or other dependents.
The reality is that the wealthy have known this for centuries and quietly amass huge fortunes inside their POGs. Walt Disney famously started his company with money borrowed from a life insurance policy. Now the POG is starting to sound like a real pot of actual gold, right?
The key to benefitting from this instrument properly is to have a long-term view and strong cash management skills (aside from a well designed policy). There are two things that you cannot let happen: not pay your premium or let the loan compound to unsustainable levels. This is where most people fail.
Many people buy a policy they can’t sustain. A few years in, they see the cash value and strop paying. You get money back and that is very tempting, but also devastating.
When borrowing against the cash value, it is absolutely critical to pay at least the interest on a yearly basis. This is simple math. The interest does not start compounding until after you've left it untouched for a year. And as we should know but often underestimate, runaway compounding is devastating.
I'll dive into life insurance multiple times in this publication, but want to leave you with this key aspect. I am not a licensed insurance distributor and it is absolutely critical you find a great one, as most will sell high commission products rather than ones that benefit you in the long term.
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Disclaimer: All material is provided for educational purposes only and does not guarantee any financial results. This is not financial, legal, or tax advice. I am not a financial professional. Results vary and are dependent on individual effort, timing and circumstances. There is no solicitation to invest.